2016 Latin American Business Environment Report

Brian C. Gendreau Timothy E. McLendon

January 2016 1 The contents of this report were developed under a National Resource Center grant from the U.S. Department of Education. Those contents, however, do not necessarily represent the policy of the U.S. Department of Education, and you should not assume endorsement by the Federal Government. PREFACE

The 17th edition of the Latin American Business Environment Report (LABER) represents the first edition in which principal authorship was assumed by Brian Gendreau, the new director of the University of Florida’s Latin American Business Environment Program. Timothy McLendon will continue to author the legal environment section. With a new author come some changes in appearance and focus, as well as the introduction of two Latin American countries in the Caribbean (Cuba and Haiti). The most obvious change involves the title to the document which will henceforth look forward to the year ahead instead of backwards. Thus, this 17th edition will be considered the 2016 LABER. However, this year’s LABER remains true to Dr. Terry McCoy’s original vision of providing a fair and accessible evaluation of the economic, social, political, policy and legal developments in Latin America over the past year that impact the region’s business and investment climate.*

LABER is a publication of the Latin American Business Environment Program (LABEP) in the Center for Latin American Studies in collaboration with the Center for Governmental Responsibility (CGR) in the Levin College of Law at the University of Florida. Through graduate degree concentrations, courses and study abroad opportunities, LABEP (http:// www.latam.ufl.edu/research--training/la-business-environment) draws on the diverse expertise and considerable resources of the University to prepare students for careers related to Latin American business. It also organizes conferences, supports the publication of scholarly research and provides professional consulting services.

CGR is a legal and public policy research institute at the Levin College of Law with research programs and grant projects in environmental law, social policy, international trade law, and democracy and governance. CGR provides academic and clinical instruction for law students, and public extension and information services through conferences and publications. CGR has a long history of collaborative work in Haiti, throughout Latin America, Europe and Africa. CGR (http://www.law.ufl.edu/areas-of-study/centers/cgr) hosts an annual “Legal & Policy Issues in the Americas Conference”, now in its 17th year.

Samantha Soffici helped with economic research, while Lauren Samuels assisted with background research for the legal environment section. JoAnn Klein assisted with editing, and Lenny Kennedy assisted with formatting the document and tables. Dayanara Hudson assisted with the final formatting of the document. We thank them for their valuable assistance, but we alone are responsible for the content and analysis.

Brian Gendreau, Director, Latin American Business Environment Program Timothy E. McLendon, Staff Attorney and Clinical Professor of Finance Center for Governmental Responsibility Center for Latin American Studies Levin College of Law University of Florida University of Florida [email protected] [email protected]

*Electronic versions of all 16 previous reports can be accessed at http://www.latam.ufl.edu/research--training/la-business- environment/publications. The report may be cited without permission, but users are asked to acknowledge the source. i CONTENTS

PREFACE i

ABBREVIATIONS AND DEFINITIONS iii

EXECUTIVE SUMMARY 1

REGIONAL OVERVIEW 3

COUNTRY PROFILES

NAFTA REGION Mexico 12

THE CARIBBEAN Cuba 14 Dominican Republic 17

CENTRAL AMERICA Costa Rica 19 El Salvador 19 Guatemala 20 Honduras 20 Nicaragua 21 Panama 22

ANDEAN SOUTH AMERICA Bolivia 24 Colombia 26 Ecuador 28 Peru 30 Venezuela 32

BRAZIL AND THE SOUTHERN CONE Argentina 35 Brazil 38 Chile 41 Paraguay 43 Uruguay 43 TABLES 44

SELECTED SOURCES 61

ii ABBREVIATIONS AND DEFINITIONS

ALBA: Alianza Bolivariana para los Pueblos de Nuestra América (Boliviarian Alliance for the Peoples of our America), an organization founded by Cuba and Venezuela in 2004 to foster regional economic, political, social integration. Its member states, which are socialist or populist in orientation, are Antigua and Barbuda, Bolivia, Cuba, Dominica, Ecuador, Grenada, Nicaragua, Saint Kitts and Nevis, Saint Lucia, Saint Vincent, and Venezuela.

Latin America: The independent states in the Americas in which romance languages are spoken. This definition includes the Caribbean nations of Cuba, the Dominican Republic, and Haiti.

LA10: The 9 largest countries in Latin America by GDP, in PPP prices, plus Panama, included because of its large international banking sector. These are, in order of size, Brazil, Mexico, Argentina, Colombia, Venezuela, Chile, Peru, Ecuador, the Dominican Republic, and Panama.

Mercosur: (Mercosul in Portuguese). A customs union and trading bloc of countries established in 1991 to promote free trade. Its full members are Argentina, Bolivia, Brazil, Paraguay, Uruguay, and Venezuela.

Pacific Alliance: A trade bloc founded in 2011 with the goal of promoting economic integration and free trade with a “clear orientation toward Asia.” Its members are Chile, Colombia, Mexico, and Peru. Costa Rica was in the process of joining the Alliance in 2014. Its governments tend to be business-friendly.

Dollar: All references to the dollar ($) refer to the United States dollar.

Sources: Sources for the data, forecasts, and rankings used in this publication are listed either below each chart or table or in the footnotes to Tables 1 through 15.

iii iv 2016 LATIN AMERICAN BUSINESS REPORT Brian C. Gendreau and Timothy E. McLendon

EXECUTIVE SUMMARY

A weak world economy and a continued fall in commodity prices made 2015 a difficult year for Latin America, and promise to make the year ahead challenging as well. Economic challenges were accompanied in many countries by political weakness, in large part caused by the emergence of corruption scandals that tarnished governments, undermining their legitimacy and their ability to focus on economic concerns.

We classify the region’s 20 economies into three broad categories – attractive, problematic, and mixed – according the overall character of their business environments. The table below further indicates if the yearly performance has improved (▲), deteriorated (▼), no significant change (=) or uncertain (?). In 2015, only six environments improved and four deteriorated, while the remaining were unchanged. None of the changes was of the magnitude to justify reclassifying an environment nor did any country abandon its basic orientation. However, a new government in Argentina may well change that environment in future years. The outlook for 2016 remains guarded because of the weak global growth and the region’s emerging fiscal and external imbalances.

LATIN AMERICAN BUSINESS ENVIRONMENTS

2014 2015 2016 Environment Environment Attractive Problematic Mixed Attractive Problematic Mixed Outlook NAFTA REGION Mexico ▲ = ▲

ANDEAN SOUTH AMERICA Bolivia ▲ ▲ = Colombia ▲ ▲ ▲ Ecuador ▲ ▼ ▼ Peru = = = Venezuela = ▼ ?

BRAZIL & SOUTHERN CONE Argentina ▼ = ▲ Brazil ▼ ▼ ▼ Chile ▼ = = Paraguay = ▲ ▲ Uruguay = = ▲

CENTRAL AMERICA & CARIBBEAN Costa Rica = = = Cuba ▲ ▲ Dominican Republic ▲ ▲ = El Salvador = = = Guatemala = = = Haiti ▼ ? Honduras ▼ = = Nicaragua = = = Panama ▲ ▲ ▲ Total 9 4 5 9 5 6 1 2 REGIONAL OVERVIEW

ECONOMIC OUTLOOK Figure 1. Economic performance LA10 countries Just a year and a half ago economic growth in Latin America appeared to be on a sound footing. In the 2014 2015e 2016f ten years ending in 2013, despite the 2008-09 global Real GDP, % 1.3 -0.5 0.7 recession, the Latin American economies had expanded at an average rate of 4.2% per year. Household incomes Inflation,% 11.4 18.9 21.0 had risen rapidly, and income inequality had declined in almost every Latin American country even as it worsened Unemployment rate, % 5.5 6.2 6.9 in the developed world. The proportion of extremely poor people in Latin America fell by more than 50% in the Current account, % of GDP -2.7 -3.1 -2.7 2000s, from 25 percent of the population to 12 percent according to research by Nora Lustig (2015). Fiscal balance, % of GDP -3.9 -5.8 -4.4

The outlook for Latin America today is clouded. GDP Source: 2014: ECLAC; 2015-16: Consensus forecasts from Bloomberg. The LA10 are the 10 largest economies in Latin America growth declined in the region as a whole in 2015. Brazil, by GDP in PPP prices: Argentina, Brazil, Chile, Colombia, Dominican Ecuador, and Venezuela are in recession, and growth has Republic, Ecuador, Mexico, Panama, Peru, and Venezuela. weakened in almost every other country. The consensus among forecasters is that growth will resume in Latin America as economic activity in the developed world picks up, but the recovery is expected to be weak until 2017, Figure 2. Global GDP growth and some countries will struggle to climb out of recession.

Adjusting to external shocks As has often been the case in the past, Latin America’s recent downturn can be attributed mainly to external shocks. During 2004-13, the boom in commodity prices, mainly reflecting demand from China, lifted growth rates throughout Latin America, especially in those economies that were large exporters of primary products such as oil, metals, and food. As China became a major trading partner of Latin America, the trend toward diversification of exports away from primary products that had been underway over the previous two decades was arrested or reversed (with Mexico being a notable exception). Thus, when China’s growth began to decelerate from its 2003- 10 average growth rate of 10%, so did Latin America’s. Figure 3. Commodity prices are s@ll falling And when commodity prices began to plummet in mid- 2014, the downturn gained momentum.

The loss to GDP in each country in Latin America in the past two years has been closely related to its dependence on commodities, with oil-dependent Ecuador and Venezuela suffering the largest declines in GDP. Both countries, which had relied heavily on oil revenues to support government spending, are now facing severe budgetary squeezes. Mexico — whose economy is now closely integrated into manufacturing and other supply chains in the United States — was affected the least (Figure 4).

3 Latin America also is being affected by a second Figure 4. Commodity dependence and loss to GDP external shock — the prospect of higher interest rates in the United States. After keeping short-term interest 2014-‐15 rates near zero since 2008, the Federal Open Market Committee — the policymaking body of the Federal Reserve — raised its interest rate target to the 0.25% to 0.50% range on December 16. That increase is not in of itself a concern. Instead it is the expectation that a strengthening U.S. economy will lead the Fed to continue to raise policy rates, which will in turn result in higher yields across the board for government and corporate bonds and mortgages. As yields in the United States become more attractive relative to the returns available in Latin America, the concern is that capital flows will diminish, to the detriment of investment and growth in the region. These concerns have some validity. Research at the World Bank found that measures of economic activity such as interest rates and industrial production in the developed countries could explain about half of the variability in flows to Latin America in the 1990s. Mutual fund flows, Figure 5. Exports of primary products moreover, indicated that investors are already taking their money out of the region. A total of $12.5 billion flowed Exports of primary products out of Latin America bond and equity funds and out of % of total exports of goods allocations to the region by global and emerging market 1980 2000 2013 funds in the four months ending December 2015. This Argentina 76.9 67.9 66.9 amounts to an estimated 24% of the Latin American Brazil 62.9 42.0 63.6 assets under management in those funds, according to Chile 88.7 84.0 86.1 EPFR, a firm that tracks mutual fund flows. Currencies Colombia 80.3 65.9 82.4 in Latin America have weakened, and central banks in Mexico 87.9 16.5 23.8 Brazil, Chile, Colombia, and Peru, concerned that weaker Peru 83.1 83.1 85.4 currencies will mean higher inflation, have had to raise a interest rates. Inflation is running above targeted levels in Venezuela 98.5 89.1 97.6 all four countries. Latin America 82.8 42.6 53.0b Yet worries about the adverse effect of higher interest rates in the United States on growth in Latin America may Source: ECLAC a 2011 b includes the Caribbean be overblown. First, the Federal Reserve is normalizing monetary policy and not engaging in the kind of tightening that would be warranted by an overheated Figure 6. Forecasts from Fed funds futures economy. Indeed, until recently the debate within the Fed % was whether the U.S. economy was strong enough to Current Fed funds rate Dec 16, 2015 1.00 warrant lifting interest rates at all. The Fed funds futures target 0.25% to 0.50%

market expects the Fed to continue to raise interest rates 0.80 though 2016, but at a modest pace, and to a level of no Futures yields: more than 1 percent by the end of the year (Figure 6). 0.60 Second, a pickup in growth in the developed world should Jun 13, 2014 help offset, to an extent, the effect of higher interest 0.40 rates on Latin America. 0.20 Jan 27, 2015

0.00

Contract maturity Source: Bloomberg

4 The consensus currently sees a rise in real GDP growth Figure 7. The oil futures market expects only a to 3.0% in the United States in 2016, and to 1.6% in the eurozone. Stronger growth in the developed world modest rise in prices means stronger demand for Latin America’s exports. Weak commodity prices associated with increased $/bbl., Brent crude supply, however, will limit the boost to Latin America’s 120 Futures prices: growth from the pickup in export demand. Hopes on June 14 100 the part of oil analysts that oil prices would recover to around $60 per barrel have been dashed by tepid growth 80 June 15 in Europe and the emerging markets and by the failure of OPEC to agree to production cuts. The oil futures 60 Sep 15 market currently foresees that oil prices will rise from 40 Spot price current levels, but only to about $50 per barrel by mid- Jan 16 year 2017. The outlook is also for continued weakness 20 in other commodities as well, especially metals. The IMF, for example, is forecasting no recovery in the prices of copper or iron ore through 2017. However, it envisages a Source: Intercontinental Exchange recovery in prices of some agricultural products such as wheat and soybeans by end-2016. Figure 8. Main export des3na3ons Not all countries in Latin America are major commodity exporters, and some are net importers of oil. As a result, low commodity prices will produce a divergence in performance across the region. Growth in the commodity producing countries will remain weak relative to economic activity in Caribbean nations that derive a large portion of their incomes from tourism. Growth also will not be greatly affected by the commodity shock in Mexico, whose major exports are manufactured goods and whose economic fortune is closely linked to that of its major trading partner, the United States, where GDP is expected to grow by 2.5% in the year ahead, according to the consensus.

A sea change in the region’s political environment? Voters in Argentina and Venezuela recently sent a Figure 9. Most major La3n American currencies strong message that statist policies in those countries have fallen rela3ve to the U.S. dollar no longer enjoy popular support. In Argentina, Mauricio Macri, the mayor of Buenos Aires, was elected in a run-off election on November 22 against Daniel Scioli, the Peronist would-be successor to President Cristina Fernández de Kirchner. Mr. Macri’s victory means the end of 12-years of Peronist control of the executive branch in Argentina under Cristina Kirchner and her husband, the previous president, Néstor Kirchner. Mr. Macri favors a less interventionist role for the state in the economy, and has already lifted foreign exchange controls and phased out taxes on agricultural exports. He has said he would like to improve relations with Washington and the more market-oriented economies of the Pacific Alliance (Chile, Colombia, Mexico, and Peru). In Venezuela, the opposition won a two-thirds supermajority of seats in the National Assembly on December 6, delivering a powerful blow to President Nicólas Maduro and the ruling United

5 Socialist Party. It was the first clear defeat for the populist in the Gulf of Venezuela that have never been formally movement, founded by former president Hugo Chavez, demarcated between the two countries. Even more and in power since 1999. Voters in Venezuela were seriously, the Venezuelan proclamation claimed nearly all frustrated by the steep decline in the economy, by price the territorial waters of neighboring Guyana, reviving the and currency controls that have resulted in shortages of dormant territorial dispute between the two countries, food and medicines, and by the government’s increasingly and drew the rebuke of CARICOM nations (including many harsh suppression of political dissent. of Venezuela’s own Petrocaribe beneficiaries). Guatemala has discussed a referendum on whether to appeal its While some observers have heralded the opposition territorial dispute with Belize to the ICJ, and its incoming victories as a turn of the “pink tide” of populism that had President, Jimmy Morales, reaffirmed Guatemalan swept through many countries in Latin America over the claims. At the other end of the continent, an Argentine past 15 years, that conclusion would seem to be prema- court issued sanctions against several oil exploration ture. Peronist parties still have a majority in both houses companies operating in the waters surrounding the of Congress in Argentina, and President Nicólas Maduro’s Falkland Islands/Malvinas in defiance of Argentine laws. United Socialist party is still in control of the executive branch in Venezuela. Efforts to move away from interven- Widespread corruption allegations challenge political tionist policies can be expected to run into resistance in and judicial systems. Across the hemisphere, corruption both countries. Populist governments in Bolivia, Ecuador, scandals have damaged the legitimacy of governments and Nicaragua, meanwhile, are still firmly in office, though and contributed to public discontent. In Mexico, President weakening economies may yet lead to an erosion of Peña Nieto faced corruption allegations against the support. Nonetheless, prospects for an improvement in President, the first lady and the finance minister over the business environment in the region are brightening. alleged special deals on property. Guatemala’s President Mauricio Macri has considerable scope to move toward Perez Molina resigned over corruption charges. In more market-oriented policies through executive action Panama, former President Martinelli and several of this in Argentina. In Venezuela the opposition has enough closest allies face corruption charges. Chile’s President votes in the National Assembly to call for a presidential re- Bachelet was weakened by a scandal involving her son. call referendum, though opposition leaders have said that Paraguay’s government faced corruption scandals their priority is to focus on improving the economy. involving the national police and the comptroller general. Meanwhile, Brazil is confronting the most serious and LEGAL ENVIRONMENT most damaging corruption scandals in the region, with the Petrobras affair implicating members of the Labor As can be seen in Tables 14 and 15, the legal environ- Party as well as prominent business leaders, while other ment in Latin America throughout 2015 largely continued corruption charges have targeted the president of the existing trends. The divergence continues between the chamber of deputies and close allies of former president more populist group of countries — especially Argentina, Lula da Silva. Bolivia, Ecuador, and Venezuela — where governments have targeted property rights and freedom of expres- Judging from Transparency International’s 2014 survey of sion and freedom of the press, and countries which have corruption perceptions (the most recent available), recent demonstrated a strong commitment to the rule of law. progress toward fighting corruption in Latin America Many countries in the region, especially Mexico and those has been mixed. Among the 21 countries covered in Central America, continue to face major security and in this report, eleven moved up in global corruption public safety issues. Finally, corruption scandals have perception rankings, and 10 moved down (see Table 14). tarnished governments across the region, posing a chal- Corruption remains a serious problem in the region, with lenge both to political legitimacy and to judiciaries. an average rank of 77 out of 175 countries. Yet viewed in a longer perspective, there are signs of improvement. International and border disputes continue to simmer. Perceptions of corruption, as measured by Transparency In September, the International Court of Justice (ICJ) International’s survey-based scores, have declined in all ruled that it has jurisdiction to consider Bolivia’s claim that but four countries in Latin America since 1998. Chile has violated its treaty obligations to provide Bolivia with sovereign access to the Pacific Ocean. The issue of access, lost in the War of the Pacific, has long embittered relations between the two countries. Elsewhere, Venezuela’s President Maduro’s proclamation of maritime defense zones offended Colombia, by claiming waters

6 prosecutor, as well as bodies to monitor, investigate and Figure 10. Corrup.on percep.ons have declined adjudicate corruption cases. since 1998 — survey scores have improved

Ride-share organization faces opposition, but different treatment in Mexico and Brazil. Uber, the popular app-based ride-share service, has faced occasionally violent protests from traditional taxi drivers who have disrupted traffic and damaged or destroyed Uber vehicles. Mexico City seems to have chosen a regulatory model that will allow Uber to operate, but major Brazilian cities, including Rio de Janeiro and Brasilia, have voted to ban the service, while São Paulo seems to have decided on a regulatory approach.

BUSINESS CLIMATE

Judging from this year’s World Bank rankings, it is becoming easier to do business in Latin America. The World Security concerns abide. Mexico continued to face Bank assesses countries each year on the quality and ef- widespread violence caused by the operations of drug ficiency of the regulations involved in setting up and op- gangs, and also suffered the embarrassment of the erating a business. As can be seen in Figure 11, this year escape from prison by Joaquín “El Chapo” Guzmán, head 13 out of 18 Latin American countries had a higher score of the Sinaloa drug cartel. El Salvador and Honduras than the year before. Some evidence of the improvement continued to face heightened levels of crime and violence can be seen in the subset of seven of the World bank’s related to drug gang activity, which also affected Panama 36 indicators reported in Table 15. Six countries — the and Costa Rica. In Colombia, negotiations between Dominican Republic, Ecuador, Mexico, Panama, Para- the government and the FARC guerrillas continued, guay, Peru, and Uruguay — showed improvements in the notwithstanding clashes between the guerrillas and the reported indicators, while two countries — Bolivia and military that endangered the truce between the two Chile — saw only deteriorations in their business envi- forces. Journalists often have been special targets of this ronment indicators. The pattern was mixed for all other violence, a fact noted in separate reports issued by the countries. Chile had deterioration in only one indicator, Inter-American Press Association and Freedom House. but it is an important one: the corporate tax rate. In 2014 Chile passed a tax reform law that provided for an Constitutional changes coming. Chile’s President is increase in the corporate tax rate, to be phased in over pushing to replace that country’s constitution which four years. Latin America, however, still has a lot of room was adopted during the Pinochet dictatorship. Still to be for progress in improving the quality and efficiency of its determined is whether it will be done by the Congress, regulation of businesses. Only one country in the region or by a constituent assembly. In Bolivia, citizens will vote — Mexico — has an overall score that places it in the top on amendments to allow the re-election of their pop- quartile among the 189 surveyed nations in ease of doing ulist president, while in Ecuador a package of amend- business, and eight countries are in the bottom half of the ments including such a provision has led to protests and rankings, including Argentina, Brazil, and Venezuela. prompted President Correa to state that he will not seek re-election in 2017. The Dominican Congress removed a ban on presidential re-election, clearing the way for President Danilo Medina to seek a second term in 2016. In Honduras, the constitutional chamber of the Supreme Court invalidated the constitutional provision forbidding presidential re-election (the same provisions that same court found President Manuel Zelaya to have violated and for which they removed him from office in 2009). In Mexico, on the other hand, the states ratified a constitutional amendment to establish a National System of Public Integrity which will include a special anti-corruption 7 it ratings. Brazil’s spreads widened sharply as concerns Figure 11: World Bank ease of doing mounted about its large budget deficit and a deepening business rankings recession that will make it difficult to keep the deficit- un der control, and its current political turmoil. 2015 Rank Score Mexico 38 73.7 ↑ S&P downgraded Brazil’s bonds to junk status on Sep- Chile 48 71.5 ↑ tember 9, followed by Fitch on December 16. Venezuela’s spreads, which have been pricing in a high probability of Peru 50 71.3 default for many months, also widened sharply before Colombia 54 70.4 ↑ backing down somewhat toward the end of the year. Ven- Costa Rica 58 68.6 ↑ ezuela is currently rated Caa3 or CCC by the three major Panama 69 65.7 rating agencies, levels that signal that the country’s bonds Guatemala 81 63.5 ↑ are either extremely speculative or at risk of imminent El Salvador 86 62.8 ↑ default with little prospect of recovery. Despite suffer- Uruguay 92 61.2 ↑ ing a large deterioration in its terms of trade (the price a Dominican Rep.93 61.2 ↑ country gets for its exports relative to what it pays for its Paraguay 100 60.2 imports), Chile’s borrowing costs did not rise substantially Honduras 110 58.1 ↑ in 2015. Spreads on Chile’s 10-year sovereign bond rose Brazil 116 57.7 ↑ only about 80 basis points during the year. Chile enjoys Ecuador 117 57.5 ↑ the highest credit ratings in the region. Argentina 121 56.8 Nicaragua 125 55.8 ↑ Figure 12: Widening sovereign spreads Haiti 182 39.6 ↑ Spreads over U.S. Treasury yields on 10-‐year U.S. Venezuela 186 35.5 dollar-‐denominated government bonds

Source: World Bank, Doing Business 2016: Measuring Regulatory Quality and Efficiency. The rankings are based on each country’s score which seeks to capture the gap between an economy’s performance and a measure of best practice cross 36 indicators, with 100 the highest possible score. The rankings are benchmarked to June 2015. The median score for 189 countries was 61.1, the top quartile had scores above 71.8. An arrow point upward indicates a higher score in the most recent ranking.

INVESTING AND FINANCE IN LATIN AMERICA

Capital not only failed to earn a return commensurate with risk in Latin America in 2015, it lost principal. The MSCI Emerging Markets Latin America Index was down 34.3% in dollar terms through December 31, underperforming against markets in emerging Asia, Europe, Japan, and the The widening of spreads on Latin American corporate United States by a wide margin. (The MSCI All-Country bonds, meanwhile, can be traced to the higher dollar. World Index — a broad index of stock prices in the devel- The depreciation of Latin American currencies against oped and emerging markets — was down 1.8% through the dollar makes it more expensive for firms to service December 31. ) Latin American equities tend to do poorly dollar-denominated debt. Spreads on Latin American in periods of weak growth in the developed world and corporate bonds have risen by 265 basis points since the when commodity prices are weak, and 2015 was hardly an dollar started marching upward in late summer of 2014. exception. The region’s sovereign and corporate bonds also lost value, with spreads over U.S. Treasuries widening Capital flows into Latin America, which had held up well in as investors focused on weakening economies and on the 2014, declined in 2015 and are on track to decline further prospect of higher interest rates in the U.S. A divergence in 2016. Mostly the projected decline in capital inflows developed among countries, with investors demanding reflects smaller current account deficits. This is notintui- wider spreads on bonds from countries with lower cred- 8 tive: Exports and export values have been falling for most Figure 13: Spreads on La3n American corporate of the commodity-producing countries, which would bonds have risen with the dollar ordinarily mean a wider deficits. But weakening domestic economies and depreciating currencies have meant lower import demand. The consensus among economists is that the aggregate current account for the LA10 economies in the region will decline by 19% to $122 billion in 2016. Smaller current account deficits need less in the way of funds from abroad to finance them. In addition, the deterioration in the macroeconomic environment in many countries also has made the region less attractive to investors. Also, issuers of securities in international markets are likely to have to compete with higher interest rates on securities in the United States in 2016.

Figure 15 presents capital flow projections for each of the ten largest economies in Latin America. These are not bottom-up forecasts of financial flows and securities -is suance, but instead the projections implicit in the consen- Figure 14: Less capital is expected to ﬂow into sus forecasts of current account balances and changes La3n America in international reserves. As such, they need to be inter- preted with some caution. Mexico, for example, enjoyed capital inflows in 2014 that were substantially higher than would have been predicted by summing up its projected current account balance and its change in reserves. The consensus–based projections also do not take into account capital flight, which is difficult to measure because it is unrecorded. But capital flows estimated from macroeconomic aggregates do pick up the trends in actual capital flows.1 Taken as a whole, the projections indicate that capital flows into Latin America declined from $198 billion in 2014 to $145 billion in 2015, and will fall further to $131 billion in 2016. Figure 15: Capital ﬂows by country The decline in capital flows is visible in the sharp fall- $ billions off in bond issuance by Latin American borrowers in the second half of the year. In the first half of 2015, Latin American sovereign and corporate issuers had tapped the international bond markets for almost $62 billion, according to figures compiled by ECLAC. The governments of Chile, Colombia, Costa Rica, the Dominican Republic, Panama, and Uruguay all issued at least one bond with a face value of 1 billion or more in U.S. dollars (or euros), and some issued several. Notable corporate bond issues of over $1 billion included those from America Movil, Embraer, and Southern Copper (Mexico). Bond issuance dropped off sharply in the second half of the year, with only $17 billion in issuance in the five months ending in November.

1The correlation between capital flow projections for Argentina using the methodology employed in Figure 15 and actual flows during 2001- 14 was .77, to give one example. 9 The cost of capital. While the cost of capital in Latin Figure 16: La-n American bond issuance has America has benefited from the unusually low yields on U.S. Treasury securities that serve as the risk-free rate slowed down and anchor capital costs for all U.S. dollar based issuers, this has been offset in recent months by the rise in yields on Latin American sovereign and corporate bonds. Yields on both U.S. Treasuries and Latin American bonds enter into most analysts’ estimates of the cost of capital for the region’s issuers in international markets. Figure 17 reports estimates of the cost of equity for five large Latin American countries. The cost of equity is a key component of the weighted cost of capital, which Includes the cost of debt. It can also be viewed as the hurdle rate for the required return on a 100% equity- financed investment.2 According to both models, the cost of equity is currently the highest in Brazil, where yields on sovereign bonds — and therefore the country risk and global market movements. Equity returns in Peru are premium — have risen markedly in recent months. It is the also more sensitive to local factors, such as movements lowest in Peru which has a low beta reflecting a relatively in sovereign spreads, than the other large markets in the low correlation between Peru’s fairly illiquid stock market region.

Figure 17: Es-mated cost of equity, ﬁve major La-n American countries

The sovereign yield is on 10-year government international bonds. Betas are calculated using the MSCI U.S. dollar return index for each country against the MSCI All-Country World index. The Damodoran model is described in Damodoran (2003); the Citigroup model is described in Abuaf (1997). Both use information from sovereign bond markets to estimate the country risk premium in each country’s cost of equity. A market risk premium of 6.1% was used in both models; it is the market capitalization-weighted average of the market risk premia reported for the world’s 10 largest equity markets (which includes China and India) by Fernandez. Ortiz, and Acin (2015). The risk-free rate corresponding to the yield on 10- year U.S. Treasury notes was 2.4%.

2The weighted average cost of capital (WACC) for any firm will depend on how much debt it has relative to equity, its debt cost, and the corporate tax rate it faces. For example, a Colombian firm financed 50% with debt and 50% with equity, a tax rate of 20%, a cost of equity of 9.4%, and a debt cost equal of 9.1% (the yield on the Bank of America/Merrill Lynch Latin America Corporate on December 4, 2015) would have a WACC of 8.34%.

10 Investment outlook. The flip side of fallen equity values Figure 18: Equity markets have fallen and investors is often inexpensive valuations. Currently, valuations in have redeemed shares in La;n America mutual funds Latin America’s stock markets are low by global standards. As can be seen in Figure 19, the average forecast price- earnings ratio for 2016 in the six Latin American countries with the largest equity markets was 13X in December 2015, which is lower than the average of 15X for the MSCI EAFE index, which tracks developed markets outside of the United States and Canada, and 17X in the United States. In other words, it costs less to buy a claim on a dollar’s worth of earning per share in Latin America than in the developed world. Latin America’s valuations, however, are higher than the emerging markets average of 11X, which includes China and Russia, whose valuations are exceptionally low following the sharp declines in their stock markets.

The question is whether the relatively inexpensive valuations on offer in Latin America represent bargains. Figure 19: Valua.ons and earnings growth es.mates Historically, emerging markets with low P/E ratios have subsequently tended to perform well. But inexpensive stocks can be “value traps” if there are concrete reasons that they are cheap, and any turnaround is far off. In short, valuations are not reliable market timing indicators. In judging whether valuations are warranted, it is common for market strategists to look at other indicators such as earnings growth. Stock prices and earnings tend to track one another imperfectly, but also tend not to stray too far from one another. Earnings growth in Latin America in 2015 has been either tepid or negative, seemingly justifying the low valuations. But the consensus among equity analysts is that earnings will pick up. That would suggest that, years from now, 2015 would have been a buying opportunity for Latin American stocks. Still, it would take a brave and well-capitalized investor to jump into Latin American equities now given the macroeconomic challenges the region still faces.

Sources: P/E and P/B ra1os are from MSCI. Earnings growth forecasts are consensus ﬁgures reported in Heckman Global Advisors Emerging Markets Equity Allocator, December 4, 2015. The P/B ra1os for EAFE and the United States are for the iShares EAFE exchange traded fund and State Street’s SPDR S&P 500 Exchange traded fund.

11 NAFTA REGION Figure 1. Growth in Mexico is becoming more synchronized with that of the United States MEXICO▲

• Economic activity is picking up despite lower oil prices.

• Banxico will raise rates along with the Fed — for a while.

• The need to rebuild confidence is distracting from the implementation of President Enrique Peña Nieto’s reform agenda.

For years economists have wondered if Mexico’s close integration with the U.S. economy was a mixed blessing. Supplying consumer goods and industrial inputs to the United States fostered the growth of a large and modern manufacturing sector, bringing jobs and rising incomes to workers in the industrial corridor that stretches from Mexico City to Monterey. But with 78.5% of its exports going to the United States, whose long-run potential GDP growth rate is estimated by the Congressional Budget Office to be slightly less than 2%, Mexico would appear to face a limit on how fast it can grow. During the 2004- 13 years of high commodity prices, real GDP growth in Mexico averaged just 2.7% — well below the 4.7% average for the five largest commodity-producing economies in Latin America. Now, however, Mexico is enjoying the benefits of its close links to the United States, whose economy is the strongest in the developed world. Falling oil prices dampened the growth of total output in 2015 — petroleum still accounts for about 11% of exports. While growth decelerated markedly or turned into recession in competition in the broadcasting and telecommunications most commodity-producing countries in 2015, it picked industries, and reform the banking system. Auctions of up slightly in Mexico to 2.4%, and is likely to rise to 2.8% in oil and gas fields have gone better than expected, with 2016, according to the consensus. substantial participation by foreign investors. But Mr. Peña Nieto will struggle to rebuild credibility that has been dam- The Bank of Mexico (Banxico) raised its policy rate by 25 aged by a succession of corruption scandals and growing basis points to 3.25% the day after the Fed’s rate hike in frustration about drug-related crime and violence. The December. The objective was to ward off market disrup- escape of Joaquin “El Chapo” Guzman, leader of the tions related to a narrowing of the interest rate differential Sinaloa Cartel, from a maximum security prison in July with the United States. Banxico is likely to match the first highlighted the corruption that is hampering the govern- few Fed rate hikes that occur during 2016 before stopping ment’s ability to fight crime. lest the tightening stifle growth. At this point, Mexico’s inflation is running below Banxico’s 3% +/- 1% target, which does not warrant a substantial tightening of monetary policy.

During 2016, President Enrique Peña Nieto will focus on implementing his ambitious reform agenda. The Pres- ident was successful in passing legislation in 2014 to open the energy sector to private participation, increase

12 LEGAL ENVIRONMENT adopt the new reform. Sonora will phase in the reforms through May 2016, with lesser crimes subject to the new New anti-corruption system created. In May, processes immediately. constitutional reforms to create a National Anti- Corruption System were adopted. The comprehensive Mexican Supreme Court rules in marijuana case. In a reforms will require additional implementing legislation. November decision, the Mexican Supreme Court found The new system will include a committee to help that the laws criminalizing possession and consumption coordinate federal, state and local efforts. The system will of marijuana violated constitutional guarantees of give new authority to the federal audit office to supervise self-determination and free personal development. the use of federal funds, while a new administrative The court found that any benefit the law may have court will handle major corruption cases. The reforms was disproportional to the harm produced. The court’s also include whistleblower provisions to encourage decision only applies to the four people who brought the officials or citizens to report corruption. Tax and banking case, all of whom are members of an organization working secrecy laws will be relaxed for agencies investigating for to decriminalize marijuana use. However, the case is and punishing corruption. Finally, the reforms also include a precedent that likely will be used to weaken or remove heightened sanctions for individuals and corporations laws prohibiting personal marijuana use. involved in corruption. Mexican court finds same-sex marriage bans New transparency law adopted. In May, the new unconstitutional. In June, Mexico’s Supreme Court Transparency and Access to Public Information Law declared that it was unconstitutional for states to ban took effect. The law creates a new National Institute of same-sex marriages. The court did not invalidate local Transparency, Access to Information, and Personal Data marriage laws, but provided that persons who are refused Protection, and provides that all agencies except the marriage rights can appeal to a judge who would have to Supreme Court are obliged to submit relevant information enforce the right to marry. Currently, only one Mexican to the institute upon request. state and Mexico City allow same-sex marriage.

Minimum wage now standardized across Mexico. United States to expand access for Mexican trucks. On October 1, the wages commission completed its After a three-year pilot program, the U.S. Department of consolidation of wage zones across Mexico from three Transportation will allow Mexican trucking companies to to one zone. As a result, a minimum wage of 70.10 pesos apply for long-haul operating authority throughout the per day took effect across the country. Unites States. The trucking companies will need to pass safety audits, while drivers will need valid commercial Human rights commissions criticize slow pace of permits and must meet English proficiency requirements. murder investigations. In June, the Inter-American The the access program fulfils a key NAFTA requirement, Commission on Human Rights condemned the and marks the final resolution of a long-running dispute government for the slow pace and lack of cooperation in between Mexico and the United States on access. investigating the murder of 43 teaching college students in Iguala in September 2014. The Mexican human rights commission made similar allegations regarding an alleged BUSINESS ENVIRONMENT murder of civilians by the military in Tlataya in June 2014. Both commissions noted that requests for information At 38th place, Mexico is the highest ranked Latin and to review case files had not been granted. The Iguala American country in the World Bank’s ease of doing crime was blamed on drug gangs operating with the business rankings, and rose four spots in the rankings support of the town’s police and mayor, but relatives in the past year. That places Mexico comfortably in of the victims claim that the army also may have been the highest quartile in the rankings worldwide. In two involved. areas, ease of getting credit and resolving insolvencies, Mexico ranks even higher than its overall ranking. Mexico Criminal procedure reforms expand to Sonora state. slipped in its Economic Freedom rank, but rose to the National criminal procedure reforms adopted in 2008 38th percentile in the World Bank’s rule of law ranking. and intended to be implemented nationwide by 2016 will Despite the corruption scandals that made headlines in shift Mexican courts from the traditional written process 2015, survey-based perceptions of corruption actually to one of oral trials. The reforms also are intended to improved this year. better protect defendants. Sonora state, which began to implement the reforms in September, is the last state to

13 THE CARIBBEAN Figure 1: Employment outside of government Is growing CUBA▲

• Cuba is undertaking reforms to make its economy more market-oriented.

• Cuba’s economy is still mostly state-controlled, with little sign that the government intends to ease its tight control of the political system.

• Cuba is dependent on agricultural imports, much of which comes from the United States.

After officially becoming president in February 2008, Raúl Castro launched a series of reforms intended to allow market forces to play a larger role in the Cuban economy. The reforms included: Cuba: economic indicators 1. Agricultural reform – individuals and cooperatives and Ave. 2011-13 2014 2015e 2016f state entities were permitted to cultivate small plots of land (up to 165 acres after 2012) and retain the proceeds Real GDP, % change 2.5 2.7 1.1 4.4 of the sale of the crops. The government, however, Consumer prices, %YoY n/a 5.3 4.4 3.9 retained ownership of the land. As of the end of 2012, 3.7 Government balance, % of GDP 0.6 0.5 n/a n/a million acres of idle land had been distributed to 174,271 Merchandise trade ($ bil) individuals and 2,700 legal entities (Mesa-Lago, 2014). Exports 5.9 5.2 4.4 4.7 Imports 14.5 13.1 15.0 16.2 2. Self-employment – employment in the private Current account balance, % of GDP 0.1 2.4 0.1 -0.2 sector, which had been permitted on a limited basis, was expanded to include skilled jobs and the operation International reserves ($ bil) 8.8 11.1 11.6 11.7 of small businesses such as restaurants, room rentals, Total external debt ($ bil) 23.5 25.2 25.8 26.6 construction, and transportation. Total external debt, % of GDP 125 134 139 133 Total external debt, % of exports 32 31 29 28 3. More autonomy for state enterprises – instead of allocating resources to under a rigid, central plan, state income in the unofficial market. Cuba has long maintained enterprises have been allowed to retain 50% of their that its population was fully employed, but according to after-tax profits, and managers have been given more official estimates as of 2011 between 1.3 to 1.8 million authority to make their own decisions. workers (between 26% and 36% of the workforce) were underutilized, which reduced productivity, and wages 4. Real estate – the government confiscated most and made them a fiscal burden. The government had housing in 1960, but allowed monthly rent to be dismissed almost 600,000 employees at by the start of contributed toward homeownership. Although most 2014 and had targeted 1.8 million layoffs for 2014-15. of the population owns their own homes, private (Mesa-Logo, 2014). The creation of non-state jobs was construction was banned and many residences are in necessary to absorb these dismissed employees. So disrepair, resulting in a national housing shortage. A 2011 far, however, the growth of jobs in the private sector has reform allows Cuban citizens and foreigners to purchase not been adequate to provide employment for all of the and sell homes, own a second home, and include homes dismissed employees, and Cuba’s unemployment rate in bequests to relatives. has risen to 3% in 2015 according to the Economist Intelligence Unit, though the unemployment rate does The impetus for these reforms was economic necessity. not include those not actively looking for jobs. Cuba’s economy was – and still is – mostly state- controlled, and almost 80% of the population is employed Further progress in implementing the market-oriented by the government. Wages are often too low to support reforms that began in February 2008 is likely to be basic human needs, forcing individuals to attempt to earn uneven, and some backtracking has already occurred. 14 Responding to widespread increases in food prices, the Figure 2: U.S. exports to Cuba are large, but have Cuban government in January 2016 moved to reinstate been declining recently price controls for rice and other food items. The actions reversed an earlier agricultural liberalization that allowed market prices for produce. The new price control measures are combined with efforts by the state to sell basic foodstuffs directly to the public at state-owned stores, and to ban privately owned trucks from delivering to retail vendors.”

The sectors of the Cuba’s economy that generate the bulk of its foreign exchange earnings are tourism (with 3 million tourists visiting Cuba in 2014), nickel mining, and the export of medical services – mostly to Venezuela in exchange for oil. Cubans receive an estimated $4 billion per year in remittances from relatives living abroad, which amounts to about 4.4% of GDP. Cuba is heavily dependent on Venezuela for oil, and in 2000 signed an agreement with Venezuela under which it LEGAL ENVIRONMENT obtains 100,000 barrels of oil per day (about two thirds of domestic consumption) on preferential terms. Cuba On December 17, 2014, the Obama administration is concerned that Venezuela will cease or cut back on its announced changes in U.S. policy intended to initiate a support. normalization of U.S. relations with Cuba while continuing to raise concerns about democracy and human rights. Cuba imports about 60% of its food, much of it from the Changes would occur in three areas: United States. During 2001-14, Cuba imported over $5 billion in products from the United States, most of which Re-establishing diplomatic relations. On July 1, 2015, were agricultural. The largest portion of these exports President Obama announced that the United States are poultry, corn, soybean oilcake, and soybeans. Medical and Cuba had agreed to normalize diplomatic relations, exports to Cuba were authorized by the Cuba Democracy and on July 20, the U.S. and Cuban Interests Sections Act of 1992, and agricultural exports have been permitted in Havana and Washington D.C. were converted to since 2001 under the Trade Sanctions Reform and Export embassies. Enhancement Act. In January 2016, the Office of Foreign Assets Control announced regulatory amendments to Removal of Cuba from list of state sponsors of allow U.S. banks to finance exports to Cuba for goods international terrorism. Cuba has been on the list of other than agricultural commodities. U.S. government countries that sponsor international terrorism since 1982. financing remains unavailable to exporters. Previously, In May, the U.S. State Department removed Cuba from exports from the United States to Cuba had to be paid in that list, a move that allowed the resumption of diplomatic advance or financed by a third-country bank. relations and made it easier for U.S. entities to travel to and do business in Cuba. The removal of Cuba from the U.S. exports to Cuba are still large, but have been declining terrorism list also lifted some state law prohibitions which in recent years. Analysts cite a shortage of hard currency were linked to the terrorism listing. in Cuba to pay for the imports and competition from providers of credit in other countries. Reports from the An increase in travel, remittances, and the flow U.S. Department of Agriculture and U.S. International of information to Cuba. As of December 2014, U.S. Trade Commission have concluded that the lifting of U.S. citizens are permitted to travel to Cuba under 12 licenses restrictions on travel and remittances and the provision of covering: (1) family visits; (2) official business of the U.S. U.S. government credit for exports would help the United government; (3) journalistic activity; (4) professional States regain market share. research and meetings; (5) educational purposes; (6) religious purposes; (7) public performances (including athletic events); (8) support for the Cuban people; (9) humanitarian purposes (including microfinance); (10) activities of private foundations; (11) the export and import of information or information materials; and (12) export transactions permitted under current law. 15 Cuban law from 2014 intended to promote and In addition, travelers are no longer subject to a daily limit guide foreign investment. Cuba’s Foreign Investment on expenditures, and may bring back to Cuba up to $400 Law, Law 118/2014, will allow increased foreign direct in goods, with no more than $100 in tobacco or alcohol investment. Although the law theoretically allows 100% products combined. U.S. credit and debit cards may foreign ownership of joint operations, in practice most now be used in Cuba, but the financial and technological projects have been with a Cuban government holding arrangements for their use are not yet in place. company having majority ownership. Priority sectors for foreign investment include agricultural and food The Obama administration had lifted all restrictions on production, health, energy, mining, and tourism. The family visits and remittances to family members in April law provides for certain tax incentives for investors, 2009, and in January 2011 eased restrictions on travel including no taxes on dividends and an exemption from to Cuba for a number of designated purposes, including income tax for eight years (following which the tax rate educational, journalistic, and religious activities, and will be 15%). State control and guidance is maintained, allowed limited remittances to non-family members. The and foreign projects will continue to require government administration also permitted U.S. international airports to approval. Cuban labor laws have not changed, and most initiate charter flights to Cuba. Negotiations are currently foreign investment projects will continue to involve the in progress with Cuba to permit regularly scheduled use of Cuban nationals who remain employed by a state direct flights rather than charter flights. In May 2015, the employment company. administration permitted cruise and ferry service to Cuba, though additional permits are still required. In September Mariel Special Development Zone begins to attract 2015, all limits on remittances to non-family members new investors. The port of Mariel, 30 miles west of were removed. Havana, was designated by the Cuban government in 2014 as a special development zone. With a loan from The trade embargo remains in place. The export of Brazil, the port facilities and infrastructure have been goods and services not specifically authorized in existing upgraded and should be operational in 2016. Mariel legislation and investment in Cuba is prohibited under the should replace Havana as the country’s main container Helms-Burton Act of 1996, which extended an embargo port. The Cuban government has offered investors originally put into place in 1960. The embargo also denies additional tax incentives, including a ten-year holiday on U.S. exporters access to U.S. government credits. A repeal taxes on any profits and unlimited ability to repatriate of the embargo would require Congressional action. profits. Cleber LLC, a tractor assembly company, is the Major stumbling blocks to full normalization of economic first U.S. company to request permission from the U.S. and civil relations with Cuba include human rights, which Treasury for a license to construct a facility in Mariel. remain a key concern of the U.S. government, and the settlement of claims for property expropriated during the Cuban Revolution. The Foreign Claim Settlement Commission of the U.S. Department of Justice has Cuba’s Exchange Rate Regime recognized 5,913 in claims for expropriated U.S. property The Cuban government announced in October in Cuba worth $1.9 billion, equal to approximately $8 billion 2013 that it would unify its system of dual exchange at interest. Cuba disputes the valuation of these claims, rates, but official inaction suggests it has been and maintains that any settlement should recognize the delayed, according to the Economist Intelligence value of losses Cuba has incurred from the embargo. Unit. Currently, most Cuban citizens are paid in CUP, the currency in which most domestically No changes to U.S. laws regarding Cuban immigrants. produced goods are priced. The other currency, Large numbers of Cuban immigrants have been travelling the CUC, is used for imported goods and tourist to the United States by way of Central America and transactions. The CUC is pegged at one CUC per Mexico motivated by concerns that U.S. laws that provide dollar, though state enterprises now use a variable favorable treatment to Cuban immigrants may change exchange rate of about 10 CUP per CUC. The with the improvement of relations between the two unofficial exchange rate between the two domestic countries. The Cuban Adjustment Act of 1996 allowed currencies in the non-state sector is currently 24 Cuban nationals who arrive in the U.S. to remain in the CUP per CUC. A unification of the exchange rate country, though immigrants can still be turned away at at a market-determined rate would eventually lead sea. The Obama administration announced that it has no to a better allocation of resources to productive plans to change current U.S. migration policies. activities in the economy, but the transition period could be disruptive.

16 DOMINICAN REPUBLIC = Figure 1: The Dominican Republic has been one of the fastest growing economies in La;n America • Approval ratings are high and steady for President Danilo Medina going into the 2016 election year, and a constitutional amendment will allow his reelection.

• Buoyed by services, GDP continued to grow rapidly but will eventually slow to a more sustainable rate.

• The government will continue to focus on efforts to reduce poverty and improve education.

President Danilo Medina’s agenda of education reforms, job creation, and poverty-alleviation programs is keeping his popularity high ahead of the May 2016 elections, in which he will seek another term in office. The only threat to his reelection is if his government is perceived to be ineffective in improving public safety and address corruption. Several recent anti-corruption protests are evidence of some discontent. Even though the government has adopted policies to address these issues, drug-trafficking and other crimes still pose a risk to political stability.

Trend-like growth in the United States will continue to support tourism in and remittances to the Dominican Republic in 2016. As an oil importer, the Dominican Republic benefits from lower oil prices. A sharp fall in its oil bill in 2015 halved the size of its current account deficit to an easily managed 1.2% of GDP. Falling oil prices have also reduced pressure on inflation, which is likely to remain around 3% in 2016. Although the government reported a small deficit in 2015, it received a boost to revenues from the settlement of nearly all of the $4.1 billion in debt owed to Venezuela under the PetroCaribe program. In this deal the Dominican Republic made a $1.9 billion payment LEGAL ENVIRONMENT to the Venezuelan government that featured a 52% discount. Congress amends constitution to allow presidential re-election. In May, the Congress approved an amend- Subject to budget and debt management constraints, ment to the constitution that will permit a president to be Mr. Medina’s government will focus in the year ahead on re-elected for one consecutive term. The amendment maintaining social programs and continuing to pursue clears the way for President Medina to seek another term reforms in education, labor relations, and the energy in May 2016’s election. sector. The expansion of safety nets has become a priority for the government in recent years in that poverty, Dominican Republic certifies citizenship of while now declining, is still higher than it was in 2000. In thousands, leaves more in question. In the aftermath addition, real wages have fallen in the Dominican Republic, of the contentious 2013 Constitutional Court decision mainly because most of the recent job creation has retroactively denying Dominican citizenship to thousands been in the informal sector rather than manufacturing or of residents of Haitian descent, President Medina mining. affirmed that nearly 300,000 people were able to take advantage of a program offering these migrants an 18-month window to regularize their status in the Dominican Republic. However, the Inter-American Commission on Human Rights and other observers 17 criticized the deportations of and attacks against Haitian BUSINESS ENVIRONMENT descendants. The Dominican Republic denies that there have been arbitrary deportations. An attempt by the OAS Out of 189 economies, the Dominican Republic is to mediate in the dispute was rebuffed as interference ranked 93rd in ease of doing business according to the with the country’s independence. World Bank. Unfortunately, it fell three places from last year’s report. The Dominican Republic dropped in all Constitutional Court invalidates loosened abortion categories, except the trading across borders category, restrictions. Penal code reforms enacted in 2014 where it increased by 6 points. Its highest ratings were included a provision that allowed the use of abortion in in dealing with construction permits and trading across cases of rape or incest, when the fetus was deformed, or borders in which it is the 3rd best in all of Latin America when the woman’s life was endangered by the pregnancy. and the Caribbean. Transparency International ranks the In early December, in a petition brought by conservative Dominican Republic 100th in its Corruption Perception and religious groups, the constitutional court found Index. In Latin America only Nicaragua, Paraguay, Haiti and this provision unconstitutional, restoring the previously Venezuela have lower corruption rankings. existing total ban on abortion in the country.

Changes to tax incentives offered for free trade zones. Starting in 2016, companies operating in the Dominican Republic’s 55 free trade zones will be able to offer any amount of products for sale throughout the Dominican market. Until now, only 20% of products manufactured or assembled in a free trade zone could be sold on the local market.

18 CENTRAL AMERICA Central America: Economic Indicators 2014 2015e 2016f COSTA RICA = Real GDP growth, % Costa Rica 3.5 2.6 3.3 Costa Rica grew modestly in 2015, buoyed by lower fuel prices and a strengthened economy in the United States, El Salvador 2.0 2.3 2.3 its primary export market. The country was formally Guatemala 4.2 3.7 3.5 invited to join the Organization for Economic Cooperation Honduras 3.1 3.4 3.4 and Development (OECD), a recognition of its economic Nicaragua 4.7 4.1 4.3 and fiscal maturity. New president Guillermo Solís, however, faced political turmoil, losing his culture minister to a Panama 6.2 5.8 5.9 scandal over a failed international culture festival, and his minister of science, technology and telecommunications Inflation, Dec/Dec, % over a proposed media law that would have weakened Costa Rica 5.1 0.6 3.3 Costa Rica’s traditional freedom of the press. The government has proposed a tax reform bill which would replace El Salvador 0.5 0.2 1.6 the country’s 13% sales tax with a value added tax, at an Guatemala 2.9 2.9 3.4 initial rate of 14%, rising to 15% in the second year. The Honduras 5.8 4.1 5.0 tax proposal also includes significant increases to person- Nicaragua 6.5 4.7 6.1 al income tax rates. Panama* 1.0 0.9 2.4 The business environment continues to be favorable. Costa Rica is ranked 58th in the World Bank’s 2016 ease- *See the Panama page below for more information. of-doing-business report, rising a remarkable 21 places since the 2015 report. It showed large improvements International Court of Justice settles boundary in access to credit and its tax situation. Costa Rica is dispute with Nicaragua. In December, the International ranked 47th in the world in Transparency International’s Court of Justice (ICJ) ruled on a dispute between Costa 2014 perceptions of corruption rankings. Only Chile Rica and Nicaragua on the San Juan River, which divides and Uruguay are ranked higher. Costa Rica is in the the two countries. The judges found that Nicaraguan 71st percentile rank for rule of law in the World Bank’s drainage and canal projects on the river encroached on governance indicators, again following only Chile and Costa Rica’s sovereignty. Uruguay. Costa Rica is ranked 51st in the latest Economic Freedom Index. EL SALVADOR = Corporate tax law held unconstitutional. In January, the constitutional chamber of Costa Rica’s Supreme El Salvador’s economic performance has lagged behind Court found that the corporate tax law, originally adopted other countries in Central America in recent years, a in 2011, was unconstitutional due to procedural errors in pattern which will likely continue in 2016. In November, the original, official publication of the proposal. The court Moody’s downgraded the country’s outlook to negative, suspended collection of the tax as of 2016. pointing to the need to stabilize debt and government finances. A major piece of the problem is an inadequately New banking law may help finance small enterprises. funded pensions system, and 2016 should see a pensions The Law for Development Banking, enacted in November reform proposal by the FMLN government of President 2014, took effect in May. Intended to encourage Costa Salvador Sánchez Cerén, a former guerrilla leader. Rican banks to promote small and medium enterprises Homicide and violent crime levels increased from an by reserving some 10% to 17% of the amount of a bank’s already high level in 2015, fueled by violence from drug short-term deposits for financing these entities at more gangs. An attempt to reinstitute a gang truce proved favorable interest rates. The new law also eliminated a abortive. policy under which foreign banks registered with the Costa Rican central bank were exempt from withholding Some improvement in El Salvador’s business climate. taxes on loans which are now subject to a tax rate of The World Bank ranked El Salvador 86th in its 2016 ease between 5.5 to 15%. The action may have the effect of of doing business report, an improvement from its 97th reducing some activities by foreign banks. place showing in the 2015 report. Better access to credit was the main reason for the rise. As for perceptions 19 of corruption, El Salvador is ranked 80th in the world in Figure 1: Central America has a history of running Transparency International’s 2014 rankings. El Salvador current account balances – some9mes large ones. is ranked 62nd in the latest the world in Transparency International’s 2014 rankings. El Salvador is ranked 62nd in the latest Economic Freedom Index, falling over the last five years due to deteriorations in property rights, business freedom, labor freedom and government finances.

El Salvador Supreme Court rules street gangs are terrorist groups. In August, El Salvador’s Supreme Court upheld the Specialized Law Against Terrorist Acts, allowing drug gangs to be designated as terrorist groups and permitting authorities to freeze the assets of any group categorized as such. The law defines terrorism as “the systematic use of violence” and is intended to help the country combat the wave of violence caused by drug gang activity.

GUATEMALA = Guatemala joins EFTA-Central America Free Trade Political issues dominated Guatemala in 2015. The Agreement. In June, Guatemala signed the Protocol first involved the renewal of the U.N.’s International of Accession to the European Free Trade Association Commission Against Impunity (CICIG), originally (EFTA)-Central America Free Trade Agreement, capping established in 2007. Although President Otto Pérez negotiations that began in 2010. The agreement has Molina originally opposed renewing the Commission’s already been signed by Panama and Costa Rica (where mandate, the emergence of political scandals, including it entered into force in August 2014). Negotiations with a customs fraud scheme that prompted the vice Honduras are currently on hold. EFTA member states are president’s resignation, forced the president’s hand. When Iceland, Liechtenstein, Norway, and Switzerland. CICIG investigations implicated the president himself to a social security fraud scandal which had brought down Lower minimum wages for export company workers the central bank president, congress stripped him of his suspended. In December 2014, the government immunity. He resigned and was arrested for corruption. approved a lower minimum wage for workers in light The surprise winner of the September elections is manufacturing export companies in four municipalities former comedian Jimmy Morales. His party, the National in an attempt to make these areas attractive for foreign Convergence Front, is seen as conservative and investment. However, in January, the Constitutional Court nationalist, and this was evident when comments from suspended the differential minimum wage and agreed to the Morales while campaigning seemed to express his consider the constitutional validity of the program. intent to renew Guatemalan claims against much of the territory of neighboring Belize. In addition to corruption, security concerns remained constant in 2015. HONDURAS =

Little change in the business environment. Honduras remains one of Latin America’s poorest and Guatemala ranked 81st in the World Bank’s most recent most dangerous countries, where drug gangs have ease-of-doing-business ratings, unchanged from its contributed to a soaring homicide rate. Corruption also previous ranking. In perceptions of corruption, Guatemala remains a problem. In September, the OAS created a ranks 115th in the world in Transparency International’s Mission to Support the Fight Against Corruption and 2014 rankings, and the events of 2015 seem to validate Impunity in Honduras (MACCIH), an international panel that ranking. Guatemala ranked 87th in the 2015 to advise and support Honduran authorities investigating Economic Freedom Index, reflecting concerns about corruption. Critics had pushed for a stronger independent threats to business freedom and property rights. investigating entity akin to Guatemala’s CICIG, which has played a key role in uncovering corruption in that country. In January, Honduras ratified a Foreign Account 20 Tax Compliance Act (FATCA) agreement with the United Figure 2: Remi,ances from overseas workers are States, which should improve tax compliance by U.S. An important source of income in Central America citizens and residents.

Room for improvement in the business environment. Honduras ranked 110th in the World Bank’s ease of doing business ratings for 2016, up from 115th in the 2015 rankings. In perceptions of corruption, Honduras ranks 126th in the world in Transparency International’s 2014 rankings. The country ranked 116th in the 2015 Economic Freedom Index because of persistent problems with rigidity in the labor market, corruption, and government spending.

Court strikes down constitutional provision preventing re-election of president. In April, the constitutional chamber of the Supreme Court invalidated a provision of the constitution that forbade presidential re-election. An attempt by former president Manuel Zelaya to change the same provision had prompted the countries whose GDP was revised upward during the Supreme Court to remove him from office in 2009. The year. Moody’s upgraded the country’s rating, while Fitch, most recent change was accompanied by confusion that examining it for the first time, assigned it a B+ rating with added to the controversy. After an outcry by opponents, a stable outlook. Nicaragua, however, remains one of one member of the five-judge panel announced that he Latin America’s poorest countries. The grandiose plans would withdraw from the decision and change his vote, of a trans-isthmian canal, announced with great fanfare which would have prompted a review by the full Supreme in 2014 and accompanied by a 50-year concession Court. The government, however, rushed the original granted to the Hong Kong-based HKND Group, have not unanimous ruling into the official gazette, making it moved forward. The company maintains the delays are immediately effective. due to environmental studies and that work will begin in late 2016, but rumors that Wang Jing, the Chinese U.S. investigations target Banco Continental. In billionaire who heads HKND, suffered significant losses October, the U.S. Treasury’s Office of Foreign Assets in the Chinese stock market, suggest that financing the Control (OFAC) named the Banco Continental, as well as immense project may still be problematic. its owners, as drug traffickers under the Foreign Narcotics Kingpin Act. This announcement froze the bank’s U.S. Low rankings for Nicaragua’s business environment. assets, and those of its owners, the Rosenthal family. The World Bank ranked Nicaragua 125th in the world OFAC claimed the bank was an integral part of the family’s ease-of-doing-business ratings for 2016, while money laundering operations. This was the first time a Transparency International ranks it 133rd in the 2014 bank was designated by OFAC under the U.S. law. Shortly Corruption Perception Index. The country ranked 108th afterwards, Honduran authorities seized control of Banco in the 2015 Economic Freedom Index, falling slightly from Continental and began its liquidation. The Honduran bank the previous year due to concerns about property rights, regulator ensured that depositors had access to their monetary freedom and labor freedom. funds. U.S. assistance restrictions lifted. In August, the U.S. government lifted restrictions on Nicaragua’s NICARAGUA = access to international credit and bilateral assistance. The restrictions were imposed in 1990 following Nicaragua has walked a different path than most of its the confiscation of property owned by U.S. citizens. Central American neighbors. With its lower crime rates, Nicaragua had been obliged to seek an annual waiver of security is not a major concern. Under the Sandinista the restrictions. The government has been moving to regime of President Daniel Ortega, the government resolve disputes over property seized by the Sandinista has been careful not to alienate business even as it government in the 1980’s. strengthened government controls. Growth was steady through 2015, and it was one of the few Latin American

21 PANAMA▲ Figure 1: Growth in Panama’s total factor produc:vity has been the strongest in La:n America. • GDP growth came off boil in 2015 but remains the fastest in Latin America.

• Large construction projects will continue to stimulate growth over the next few years.

During 2001-15, Panama has been the fastest growing economy in Latin America, with real GDP expanding at an average rate of 7% per year. The most visible drivers of this growth have been a large and vibrant financial sector — the fourth largest in Latin America and destination of billions in funds from the rest of the region — and a construction boom. The pace of growth should decelerate as the nine-year canal expansion project ends next year, but a second Metro line and urban renewal in Colón will keep construction going for a few more years. Figure 2: Panama’s global compe::veness has improved over the last decade. A less obvious but important source of growth has been what economists call total factor productivity (TFP) — a measure of how efficiently inputs are used in producing output. According to estimates by economists at the IMF, TFP growth in Panama has been the fastest in the region. Much of this growth in TFP likely represents more intensive use of inputs in large construction projects, notably the $5.25 billion expansion of the Panama Canal. Arguably, however, improvements in the business climate have permitted resources to be used more efficiently. The business community has made a concerted effort to improve competitiveness in recent years, and the efforts have borne fruit. Although it has slipped in the rankings recently, it has risen 15 places in the World Economic Forum’s Global Competitiveness Index since 2003.

LEGAL ENVIRONMENT

Corruption investigations target allies of former president Martinelli. In March, former supreme court president Alejandro Moncada, an ally of former president Martinelli, pleaded guilty to two counts of corruption and was sentenced to five years in prison. A second supreme court judge, Victor Benavides, resigned under charges of money laundering and corruption. In April, with the former president under investigation for his role in illegal phone- tapping and corruption in a food aid program, the electoral tribunal stripped him of his constitutional immunity from prosecution. In December, a court ordered his arrest on corruption charges. However, former president Martinelli left Panama in January and now lives in Miami.

22 Panama Canal Authority appeals arbitration award BUSINESS ENVIRONMENT to contractors. In December 2014, an arbitration panel awarded contractors in the Panama Canal expansion Panama is ranked 69th out of 189 countries according $233 million over a claim that the Panama Canal Authority to the World Bank in its latest Doing Business survey, failed to provide sufficient basalt, a key ingredient in though it fell three places from its ranking in the past cement, during the construction process. The Authority year. Panama dropped in all categories, including a had assured contractors the basal would be available seven-place fall in the starting a business topic, though it during the canal expansion. The panel also found the remains the 6th easiest place to start a business in Latin Authority liable for failing to respond in a timely manner to America. Transparency International ranks Panama 94th the contractors’ concerns about the basalt. The Authority in its Corruption Perception Index, but reported crime has appealed the award to the International Chamber of victimization is the second lowest in Latin America, and Commerce arbitration tribunal in Miami. kidnapping is almost unknown in Panama City.

Free trade agreement with Mexico takes effect. After Mexico’s congress approved the Panama-Mexico Free Trade Agreement in March, the agreement took effect on July 1. The agreement is expected to increase trade between the two countries, and may set the stage for Panama to join the Pacific Alliance trading bloc.

23 ANDEAN SOUTH AMERICA Bolivia: economic indicators Ave. 2009-13 2014 2015e 2016f BOLIVIA = Real GDP, % change 4.9 5.5 4.1 3.5 Consumer prices, %YoY 5.2 5.2 4.2 5.0 • Bolivia has been enjoying the results of sound Government balance, % of GDP 0.0 -2.4 n/a n/a macroeconomic management. Merchandise trade ($ bil) Exports 8.5 12.3 n/a n/a • Nationalization and a sharp drop in investment, Imports 7.2 9.9 10.4 10.7 however, threaten future growth. Current account balance, % of GDP 4.0 0.0 -4.5 -5.0 International reserves ($ bil) 11.4 13.5 n/a n/a In contrast to the recessions and high inflation rates in the Total external debt ($ bil) 7.1 8.5 9.3 12.2 two largest APRA members, Argentina and Venezuela, Total external debt, % of GDP 28 25 n/a n/a Bolivia has been enjoying stable growth. Bolivia grew at an Total external debt, % of exports 68 49 n/a n/a average rate of 5% between 2006 and 2015, and inflation has decelerated from double-digit rates in 2007-08 to LEGAL ENVIRONMENT just above 4% in 2015. The portion of the population living below the national poverty line decreased from 57% International Court of Justice rules it may hear in 2008 to 39% in 2013, according to the World Bank. Bolivian claim to ocean access. In response to Chile’s Much of that prosperity was based on high commodity objection that the International Court of Justice had no prices, especially for natural gas. All of Bolivia’s natural gas authority on the issue, the International Court of Justice is sold to Argentina and Brazil on long-term contracts, (ICJ) ruled in September that it has jurisdiction to judge so it is sheltered from a fall in prices for the time being. the dispute with Chile over Bolivia’s access to the Pacific Growth slowed to a 4.1% pace in 2015, and is expected to Ocean. The court noted that the Pact of Bogota, signed grow at about that rate in 2016. President Evo Morales, by both countries, allows the ICJ to settle disagreements though an avowed populist, has been credited with over international obligations, including Chile’s obligation prudent macroeconomic policies that have raised Bolivia’s to act in good faith regarding Bolivia’s rights of access to international reserves to $15.1 billion — an amount that the Pacific. could cover almost 14 months’ of imports. ICSID panel rules against Bolivia over termination of The risk to Bolivia is that inadequate investment Chilean mining concessions. In September, an ICSID will impair its long-term growth potential. President panel decided in favor of a Chilean company suing for Morales nationalized the oil and gas sector after taking damages caused by the Bolivia’s revocation of mining office in 2006, and has expropriated over 20 companies. concessions in 2004. The arbitration panel found that the Foreign investors are loathe to make long-term Bolivian government violated the Chilean-Bolivian Bilateral commitments when expropriation is a risk. Gross fixed Investment Treaty. Bolivia has appealed the decision. he investment in Bolivia has fallen from an average of about case was brought before Bolivia withdrew from the ICSID $12 billion in 2011-13 to an estimated $3.3 billion in 2015, system in May 2007. with no recovery in sight. Bolivia adopts new arbitration law. Bolivia’s new law Constitutional change allowing presidential re- governing mediation and arbitration, passed in June, election goes to national referendum. In September, gives state and local authorities more power to settle the legislature approved a constitutional amendment investment disputes. The law replaces a 1997 law and that will allow the president and vice president to serve a is intended to work in conjunction with the year-old fourth consecutive term. The reform will be submitted to investment law which obliges national and foreign voters in a national referendum in February 2016. investors to settle disputes in Bolivian courts.

Morales criticized over indigenous rights. In September, Bolivia’s Constitutional Court upheld a presidential decree that, according to the Bolivian ombudsman, violates the UN Declaration of Rights of Indigenous People and the ILO’s convention 169 on the right to prior consultation. The decree determines how indigenous groups affected by extraction concessions receive compensation. The ombudsman argues 24 that, in accordance with Bolivia’s commitment to the BUSINESS ENVIRONMENT international standards, indigenous communities have the right to determine how the compensation will be Bolivia was ranked 157th in the World Bank’s latest dispensed. Further-more, those rights may be moot in ease of doing business ratings, falling two places since light of a second presidential decree allowing extraction the last report. The country ranks 35th in the world in of hydro-carbons in protected areas. Hydrocarbons and Transparency International’s 2014 corruption perceptions mining make up more than three-quarters of Bolivia’s rankings. In the 2015 Economic Freedom Index, Bolivia exports. was ranked 163rd — the third lowest in Latin America — reflecting poorly protected property rights and a less- Autonomy amendment rejected. In September, voters than-hospitable labor freedom, investment freedom, and in five departments rejected a constitutional reform business freedom environment. Bolivia ranks in the 10th that would have provided for greater decentralization percentile for property rights in the Heritage Foundation’s in separate referenda held in each department. The Economic Freedom Index — tied with Cuba, Haiti, and government pushed the measure and its defeat was Nicaragua. seen as a rare defeat for President Morales. The national ombudsman and others criticized the lack of public information available to the public about the autonomy measures.

Electoral court resigns, new court appointed. In May, the electoral court resigned over criticism of is management of state and local elections in March. In July, the legislature selected its six judges, while President Morales appointed the seventh judge. Critics and opposition remain concerned about the court’s ties to the ruling MAS party.

25 COLOMBIA▲ Figure 1. The central bank has raised interest rates as the peso has depreciated. • Colombia has weathered the decline in oil prices surprisingly well.

• The challenge for the central bank is to keep currency depreciation from feeding into inflation.

• The administration of President Juan Manuel Santos will continue to focus on concluding peace talks with the FARC.

Colombia’s economy continued to grow at an estimated rate of close to 3% in 2015 despite a drop of over 65% in the price of oil, the country’s principal export, since the middle of the previous year. Consumer spending remained firm and gross capital formation, driven by Colombia: economic indicators public works spending, continued to rise, helping to offset Ave. 2009-‐13 2014 2015e 2016f the external shock. Neither source of domestic demand Real GDP, % change 4.2 4.6 2.9 2.6 is likely to remain as strong in 2016, and GDP growth is Consumer prices, %YoY 2.5 3.7 6.5 4.1 therefore likely to decelerate. A 44% depreciation in the Government balance, % of GDP -‐3.1 -‐2.4 -‐3.1 -‐3.7 Colombian peso since mid-2014, which helped buffer the Merchandise trade ($ bil) oil shock, should lift exports and keep the current account Exports 51.0 57.0 41.3 43.8 balance from widening beyond the estimated 6.7% of GDP reached in 2015. It should also keep GDP growth Imports 47.2 61.6 53.7 53.2 from falling below 2.6%. The currency depreciation, Current account balance, % of GDP -‐2.8 -‐5.3 -‐6.7 -‐5.7 however, is feeding through to higher consumer prices, International reserves ($ bil) 31.1 44.9 46.0 47.0 and has forced the Banco de la República to raise interest Total external debt ($ bil) 73.0 100.9 103.6 108.2 rates. The decline in domestic demand should lead to Total external debt, % of GDP 23 27 36 40 slightly lower inflation in 2016, but with interest rates Total external debt, % of exports 97 116 194 201 rising in the United States and the peso expected to slide further rate hikes cannot be ruled out. A reduction in oil-related revenue, meanwhile, has widened Colombia’s fiscal deficit, which will be likely become even wider in LEGAL ENVIRONMENT 2016, but it will remain easily financed. Colombia high court convicts Uribe aides of illegal Over next few months the administration of President spying. Maria del Pilar Hurtado, former head of Juan Manuel Santos will be focused on the peace process Colombia’s defunct spy agency (DAS) and Bernardo with the Fuerzas Armadas Revolucionarias de Colombia Moreno, ex-President Uribe’s chief of staff, were found (FARC). The two sides, which began talks in November guilty of illegally wiretapping judges, politicians and other 2012 in Havana, announced on September 23 they had targets. Former DAS agents testified that they gave reached agreement in four broad areas and had set a Moreno illegally obtained information about judges. deadline of March 23, 2016 to sign a final document. Hurtado and Moreno were convicted in early 2015 and A national referendum is to follow. Agreement was later sentenced to 14 and eight years, respectively. The reached in area including transitional justice (amnesty for wiretapping occurred during Mr. Uribe’s second term, but combatants), political participation for the rebels, land it has not been determined whether the ex-president was reform, and a halt to the illicit drug trade. The agreement involved. would establish tribunals to prosecute and judge crimes committed during the conflict. Parties to the talks Colombian law makes health care a human right. are still working out the details. The agreement faces The Colombian Constitutional Court had already upheld considerable opposition in Colombia, however, and in late the law in a May 2014 ruling, but the health care reform December the FARC announced they would not sign an law was formally adopted in February 2015. In addition accord by the March 23 deadline. to formalizing the right to health care as fundamental, the new law also provides for greater access to drugs 26 and treatments, and establishes a new pricing system BUSINESS ENVIRONMENT to control drug prices. The law makes mandatory the provision of emergency services, regardless of a patient’s Colombia is the fourth highest ranked Latin American insurance status. country in the World Bank’s ease of doing business rankings, and improved in the rankings during 2015. Council of State suspends strategic mining areas Perceptions of both economic freedom and global designated by Colombian government. In May, the competitiveness for Colombia also rose. Progress in Council of State, the country’s highest administrative some areas, however, was mixed. The World Bank reports court, provisionally suspended a government decision it takes less time to start a business, but more time to to open up some 20 million hectares of land to mining register property, for example. Colombia fell in the World investment. The council found that the national mining Bank’s governance indicators, possibly reflecting a lack of agency failed to undertake prior consultation with confidence among some survey respondents about the indigenous and Afro-Colombian communities in the area terms of the government’s pending peace agreement before delineating the strategic mining areas. with the FARC rebels.

U.S. Supreme Court upholds dismissal of Alien Torts Statute claims. In April, the U.S. Supreme Court let stand an appeals court decision that held that U.S. courts did not have jurisdiction to hear claims that the U.S. fruit company Chiquita was responsible for murders and atrocities in Colombia committed by paramilitaries who were paid by paid by the company because the acts all occurred outside the United States. Chiquita pled guilty in 2007 to criminal charges involving payments to the paramilitaries and was fined $25 million. The company maintains that it paid the sums under duress to avoid violence against its workers.

27 ECUADOR ▼ Figure 1. Falling oil prices have widened Ecuador’s budget deﬁcit • Ecuador, like all oil producing countries in the region, is challenged by low oil prices.

• Economic growth is likely to be weak in 2016, with recovery dependent on higher oil prices.

• President Correa’s approval ratings have declined.

Ecuador had a tough year and slipped into technical recession — defined as two quarters’ of successive contraction — beginning in April. This resulted in a 0.3% contraction of growth and put GDP on track to grow by only 1.6% in 2015 according to the consensus among private forecasters. The IMF is even more pessimistic: it sees a contraction of 0.6%. The downturn stemmed mostly from the decline in oil prices, but lower consumer and business confidence have also played a role. Faced with a decline in oil exports, the government announced a 17% reduction in spending for 2016. In March, in an effort to replace lost oil revenues, the government announced an increase in tariff rates of up to 45% on nearly one-third of Ecuador’s imports. Traditionally, oil export earnings have accounted for about 25 % of government revenues. Budgetary and fiscal constraints have in turn prevented the government from using fiscal policy to stimulate the economy. Because Ecuador is a dollarized economy, it has no ability to use monetary policy to counter weak growth. The consensus among forecasters is that growth will pick up and Ecuador’s fiscal crisis will ease in 2016 and beyond, but the recovery is conditional on a rise in oil prices and production from new oil fields coming on line .

President Rafael Correa’s confrontational style has made international relations unpredictable. Working relations with Ecuador’s primary trading partner, the United LEGAL ENVIRONMENT States, remain strained. Close ties with China and Russia, however, have paid off, and Chinese financing of $7 billion Constitutional reforms allowing presidential for budgetary support that began in 2015 will continue reelection will not apply to President Correa. into 2016. In November, the National Assembly approved a constitutional reform package that lifts limits on President Rafael Correa has suffered a downturn in presidential reelection. Responding to widespread his approval ratings. An increase in inheritance taxes protests, the reforms were changed to become effective and his plans for constitutional reforms to eliminate in 2021, and thus will not apply to President Correa, who term limits for the president led to protests by the has ruled out running again in 2017. In October 2014, the middle-class. Although the constitutional changes that Constitutional Court ruled that the legislature could adopt were finally approved will not benefit President Rafael the constitutional reforms without a popular referendum. Correa (see below), protests likely will continue against extractive projects, poor public security, the erosion of Pension reform ends state contributions. Under a constitutional rights, and the concentration of power controversial April reform of Ecuador’s social security within the executive branch. system, the 40% state pension fund contribution will cease. The reforms were driven by a need to reduce public spending due to lower oil prices, and the measure will 28 save some $1.1 billion annually. The state will continue arbitration award to Chevron of $96 million against to guarantee the security of pensions. A law from Ecuador for other disputes related to Texaco’s work in September 2014 nationalized seven private pension that country. Chevron began arbitration in The Hague in funds, transferring them to the state social security 2006, and Chevron sued to enforce the arbitral award. agency. The pension reforms were controversial, and prompted the left-wing Avanza party to leave the Occidental Petroleum arbitration award reduced to government coalition. $1 billion. An ICSID appellate panel awarded Occidental Petroleum $1.061 billion in a claim against Ecuador for Inheritance & capital gains tax proposals withdrawn. seizing the company’s assets. The case was brought in Tax reform proposals to increase inheritance taxes on a 2006 prior to Ecuador’s withdrawal from the ICSID dispute progressive basis and to increase capital gains taxes were resolution system. The appellate panel reduced the award withdrawn after widespread protests. The inheritance tax by 40% because Occidental had transferred the oil fields proposal would have raised taxes to 47.5% on estates at issue to a Chinese company. At the time of the seizure, valued at over $35,400 inherited by immediate family Occidental was the largest oil producer in Ecuador. members. It also would have imposed a maximum tax rate of 77.5% on inheritances claimed by anyone other than immediate family members. Critics argued BUSINESS ENVIRONMENT that businesses, mostly family-owned, and real estate would be hurt by this wealth redistribution measure. The Among the four populist countries in Latin America, government is expected to revisit the inheritance tax the World Bank ranks Ecuador the highest in ease of proposal in 2016. doing business, arguably making it the best of the worst. Perceptions of corruption, however, have increased over Ecuadorean tax amnesty takes effect. The National the past year according to Transparency International, and Assembly passed legislation in April relieving taxpayers of Ecuador has also slipped in the World Bank’s governance fines, surcharges and interest on taxes owed to national indicators, suggesting a weakening of the rule of law. and local tax entities. Under the law, if taxes were paid Questionable legal guarantees and insufficient incentives in full within 60 days of the law’s publication, all fines to conduct business make the business environment and interest will be waived; if paid within 90 days, 50% of problematic. penalties and interest were forgiven.

Chevron Case repercussions continue. The Chevron case originally involved a multi-billion dollar claim for environmental damages allegedly caused by Chevron’s subsidiary Texaco. Last year, in a civil racketeering suit brought by Chevron, a U.S. federal court in New York found that the plaintiffs and their lawyers secured the Ecuadorean judgment using fraud and corruption, and held that the judgment was unenforceable in the U.S. Steven Donziger, the plaintiffs’ American lawyer, has appealed that ruling. In the meantime, Ecuador has been seeking to enforce the original November 2013 Ecuadorean judgment for $9.5 billion in other jurisdictions. In May, Brazil’s attorney general recommended that Brazil’s courts decline to enforce the judgment, agreeing with the U.S. court’s corruption holding. However, in September, the Canadian Supreme Court found an Ontario court improperly dismissed an effort to enforce the judgment in Canada. The case will return to the trial court to consider whether the judgment should be enforced. The judge at the center of the Ecuadoran judgment may or may not have recanted previous testimony in the U.S. case, but he seems clearly to have accepted payments from both sides in the case. Finally, an American appeals court upheld an international

29 PERU = Figure 1. Dollariza/on is creeping up as the currency depreciates • Surprisingly strong mining output led to modest growth in 2015. depreciates.

• The central bank hiked interest rates to dampen inflation, and more rate hikes are likely.

• Presidential elections will be held in April 2016, but the successor to President Ollanta Humala is unlikely to abandon market-oriented policies.

Like other commodity-producing nations in Latin America, Peru has struggled to cope with the decline in commodity prices, but like its fellow members of the Pacific Alliance has managed to avoid a recession and expand output at a moderate rate in 2015. Peru’s mining output rose almost 20% in the 12 months ending in September 2015. The decline in the prices of copper and gold make it unlikely that there will be a repetition of a gain of that magnitude, but two large new copper mines, Toromocho and Las Bambas, will be coming into operation in 2016 and adding to the output. On the demand side of the economy, strong credit growth and a rise in government conditional cash transfers should help sustain consumer spending.

Peru’s currency has fallen by only about 12% in 2015 — less than most in the region. But the pass-through from that depreciation has pushed Peru’s inflation rate above the central bank’s 1% to 3% inflation target. The central bank raised its policy rate 25 basis points on December 10, and is likely to raise rates further in 2016. Meanwhile, as the currency has depreciated the portion of the money LEGAL ENVIRONMENT supply held in dollars has been creeping up, complicating monetary control. New labor law approved & repealed in short order. In December, Peru’s Congress approved a labor law Peru’s next presidential elections will be held in April intended to help regularize informal employment by 2016. Currently Keiko Fujimori, the daughter of disgraced providing more flexible working arrangements (and lower former president Alberto Fujimori, has a large lead in the mandatory pay requirements) to encourage employers to polls. She represents the Fuerza Popular party, which is hire 18-24-year-olds. Thousands of students protested both conservative and populist, and advocates public the new law as discriminatory, and on January 26, investment in infrastructure to boost growth. December Congress repealed the law. polls show she has about twice the support of Pedro Pablo Kuczyinsky, an economist who was Prime Minister Peru’s Congress grants Humala special powers of Peru in 2005-06 and who favors market-friendly on economy. The Peruvian Congress in June passed policies. Milton von Hesse, the candidate of the Partido legislation giving the executive branch powers to pass Nacionalista Peruano (Peruvian Nationalist Party), a part economic reforms for a 90-day period. The government of the current ruling coalition, is trailing far behind. If is expected to pursue measures that, in addition to elected, none of the candidates is likely to abandon the previous tax cuts and eased environmental regulations, business-friendly and prudent macroeconomic policies will accelerate the country’s economic growth rate. that have supported Peru’s stable growth over the past Arguing that pension and healthcare funds are decade. Candidates in Peru typically moderate their policy jeopardized by mismanagement and not income sources, stances after taking office. Congressional opposition refused to include in the 30 legislation provisions for those programs to be funded by Maternity leave extended in Peru. In March, Peru’s mandatory worker bonus deductions. Congress ratified ILO Convention 183 which requires paid maternity leave for at least 14 weeks. The convention New decree forces telecommunications companies also defines grounds for firing during maternity leave, and to give data to police. Among the most controversial of provides for reduced working hours, and paid child care President Humala’s decrees, adopted under the special breaks. grant of authority, was one that allowed police access to metadata on cell phone users without a warrant. The government maintained the decree was necessary to BUSINESS ENVIRONMENT help combat organized crime, while critics deplored the violation of citizen privacy rights. According to the Peru is ranked number 50 out of 189 countries, in government, a warrant from a judge would be required if the World Bank’s latest Doing Business report, and the police wish to use any data acquired at trial, though moved up in the rankings. It is the third highest ranked this retroactive judicial involvement failed to assuage country in Latin America — just below Chile but above critics’ concerns. Colombia. Peru ranked even higher in the getting credit and registering property rankings, though it was ranked Peruvian justice minister resigns after firing anti- substantially lower in some areas, such as starting a corruption prosecutor. In October, the Peruvian business and trading across borders. Peru lost ground in prosecutor investigating Peru’s first lady on money- corruption perceptions and in global competitiveness, laundering charges was fired and her boss, the justice and more Peruvians report that they or someone in their minister, subsequently resigned. The prosecutor, Julia families have been a victim of a crime than in neighboring Principe, had an established career as an investigator in countries. money-laundering cases. While Principe was supposedly fired for insubordination, the justice minister stepped down to avoid impeachment and so as not to be a liability to President Humala’ administration after the firing provoked hefty protests.

31 VENEZUELA ? Figure 1. The oﬃcial exchange rate is over 130 8mes higher than the black market rate. • The opposition has taken control of the National Assembly, providing the first check on the executive branch in 17 years.

• President Nicolás Maduro and his supporters, however, can be expected to resist reform efforts.

• The economy is near collapse and neither a devaluation nor a default can be ruled out.

On December 6, voters in Venezuela sent President Nicolás Maduro a strong message of dissatisfaction. A coalition of opposition parties won 112 out of 167 seats in the National Assembly, which is a veto-proof supermajority. Voters had much to be unhappy about. Figure 2. Credit default swaps are pricing in a Venezuela’s economy is in shambles after years of high probability of a Venezuelan default. mismanagement and a sharp drop in the price of oil, its principal export, and the source of much of the government’s revenues. Price controls and a system of unrealistic exchange rates have meant empty store shelves and shortages of key imports, including medical supplies. Exchange controls, introduced by former President Hugo Chávez in 2003 to stem capital flight, have led to the growth of a large black market to satisfy the excess demand for dollars. Inflation is veering toward 200%; no one knows the exact rate because officials have not published figures for 2015. The economy is in a deep recession, with GDP having declined by 8.3% in 2015, according to the consensus.

The question now is how effective Venezuela’s new *5-‐year swaps for Brazil, Chile, Colombia, majority in the National Assembly will be in bringing about Mexico, and Peru, weighted by GDP. change. The opposition coalition has enough votes to force a referendum to recall the president, but coalition leaders have said that they intend to focus first on providing economic relief. It is hard to imagine, however, that the opposition will not press soon for the release of political prisoners, including Leopoldo López, a popular leader of one of the opposition parties.

President Maduro and his supporters will resist attempts to roll back the Chavista legacy. In late December, the lame-duck National Assembly approved 13 new Supreme Court judges, and the ruling party filed challenges to the election of 22 opposition legislators. Although economic hardships have eroded support for Chavismo among its lower socio-economic constituents, polls indicate that many Venezuelans who voted for the opposition still support the Chavistas’ redistributive policies.

32 Clashes between the ruling party and the opposition through the end of December, and it is expected that the are likely to delay the adjustments needed to stabilize same will happen for the other states on the country’s the economy and remove economic distortions. In the border with Colombia. The government cited threats meanwhile Venezuela’ international reserves are falling, posed by paramilitaries and contraband flowing across making a devaluation — the fifth since 2003 — a distinct the western border. possibility. Meanwhile, a default on Venezuela’s sovereign bonds cannot be ruled out. With spreads on 5-year Opposition leader López convicted and sentenced. credit default swaps (market-traded instruments that In September, opposition leader Leopoldo López was provide protection against default risk) at over 6330 basis found guilty of arson, criminal association and conspiracy, points in late December, the market is pricing in a 19% damage to public property and inciting violence and given probability of default within one year, according to analysts a sentence of nearly 14 years imprisonment. The case at Deutsche Bank, and a 97% probability of default within arose from opposition protests in Caracas in February five years. 2014 that tuned violent and resulted in two deaths. The charges drew widespread international criticism.

LEGAL ENVIRONMENT Maduro given decree powers through end of 2015. A March enabling law granted President Nicolás Maduro Supreme Court rejects suit against central bank over power to legislate on security and economic matters economic statistics. In July, the Venezuelan Supreme by decree through December 2015 as part of the fight Court rejected a suit against the central bank over its against “imperialism”. The first measures taken under failure to publish the country’s economic statistics, the law involved the nationalization of food distribution including the consumer price index. The Venezuelan and measures to ration medicine. Mr. Maduro previously affiliate of Transparency International argued that the had been granted decree powers from November 2013 withholding of macroeconomic indicators thwarts through November 2014. As that earlier grant expired, reasonable analysis of and response to economic the president issued decrees increasing value added conditions. Heading into the December elections, the taxes, as well as taxes on cigarettes and alcohol, and government is alleged to have pressured the head of the increased fines for tax violations. The Organic Fair Prices central bank not to release bad economic news. Act, adopted by decree in November 2014, provided for confiscation of contraband goods and required Maritime decree offends both Colombia and that government-mandated prices would be placed on Guyana. In May, President Maduro issued a decree products. setting maritime defense zones. Under the decree, one zone essentially extended across all of Guyana’s OAS criticizes Venezuela’s electoral system. In territorial waters, reviving the long-running dispute over November, the Organization of American States Venezuela’s claims to the 2/3 of Guyana’s territory lying addressed a letter to the Venezuelan national electoral west of the Essequibo River. The maritime jurisdiction council expressing deep concern over the legitimacy extension coincided with oil exploration efforts licensed of the country’s election process. The extensive list of by the Guyana’s government. President Maduro repeated shortcomings included: changing game rules, arbitrary Venezuela’s position that the 1899 arbitration agreement imprisonment of opposition leaders, and judicial that determined the boundaries between Venezuela and intervention in the affairs of opposition parties. The Guyana was “null and void” and recalled his ambassador president of Venezuela’s national assembly dismissed to Guyana. The westernmost Venezuelan defense zone the OAS charges, and the organization was not invited also included all of the Gulf of Venezuela, including waters to observe the December elections. Instead, Venezuela that are disputed with Colombia. Both of Venezuela’s invited the more accommodating Union of South neighbors protested the actions, which were also American Nations (UNASUR) to fill that role. criticized by Caricom at its July summit. A re-drafted decree attempted to mollify the Colombian concerns. Maduro extends border closures with Colombia. In BUSINESS ENVIRONMENT September, President Maduro decreed a state of “exception” in the state of Zulia, in effect closing the Venezuela is one of the least hospitable countries in border with Colombia, increasing deportations of illegal the world for business. According to the World Bank’s Colombian immigrants, forcing voluntary repatriations, 2015 Doing Business report, it ranked 186th out of 189 and further disrupting trade between the two countries. countries, sandwiched between the Central African The state of emergency in Tachira state was extended Republic and South Sudan. It is in the lowest quartile of

33 the rankings in seven out of the 11 areas in which the World Bank ranks countries, including starting a business, Venezuela’s Exchange Rates getting electricity, paying taxes, and trading across Venezuela has three official exchange rates. borders. It is at the bottom of the World Bank’s rule of law The official currency peg, which is reserved for ranking, and ranks 176 out of 177 countries in corruption public-sector imports, is 6.29 Bolívars per dollar. perceptions. Reported crime victimization is the highest A second rate, for so-called priority imports, in Latin America. was trading at 13.50 Bolívars per dollar in late December. The third rate, introduced in February 2014, can be used by anyone not authorized to buy dollars at the preferred rates. It has been trading at around 200 Bolívars per dollar. A vibrant black market has arisen for dollars. The black market rate, sometimes called the Cúcuta rate after the Colombian border town in which many such transactions reportedly occur, was around 840 Bolívars per dollar in late December. The official exchange rates are overvalued, making conversion of official statistics to dollar values at those rates unrealistic.

34 BRAZIL & THE SOUTHERN CONE Figure 1. Argen,na’s two exchange rates

ARGENTINA▲

• Mauricio Macri’s election as president ends 12 years of Peronist control of the executive branch.

• The new administration has already lifted currency controls and eliminated taxes on agricultural exports.

• Efforts to reduce inflation and the fiscal deficit will dampen growth in the short run.

During the 2004-13 years of high commodity prices, Argentina grew at a 5.9% average rate — the kind of growth typically associated with Asian economies. Since then Argentina’s economy has faltered, and not just because agricultural export earnings have sagged. Inflation — stemming in part from monetary financing of the budget deficit — has risen to about 25% according to private analysts, who are still wary of official statistics. An overvalued official exchange rate and currency controls, meanwhile, have distorted relative prices, fostered the growth of a parallel “blue” foreign exchange market, and led to shortages of imported intermediate goods. The economy has barely grown during the past two years. Responding to his party’s call for change, voters gave Buenos Aires mayor Mauricio Macri 51.4% of the vote in a run-off election on November 22 for president over Daniel Scioli, the Peronist candidate.

President Macri will attempt to tackle several tasks at Congress can be expected to resist spending cuts and once. The first is to eliminate the distortions that have the elimination of subsidies, though Mr. Macri has pledged hamstrung the economy. Within days of taking office on to maintain popular social programs. December 10, he announced the elimination of taxes on the exports of several agricultural products, and on December 15 lifted currency restrictions. Companies LEGAL ENVIRONMENT and individuals will now be allowed to buy up to $2 million per month in foreign exchange, with no limits for New unified civil and commercial code takes effect. importers. Second, the government will seek to negotiate In August 2015, Argentina’s new civil and commercial a settlement with creditors. Argentina defaulted on its code, adopted in October 2014, took effect. The new international debt in 2014 and has since lacked full access code replaces the civil code of 1871 and the commercial to international capital. Third, Mr. Macri will need to bring code of 1862, and introduces a variety of changes both Argentina’s fiscal deficit, which reached six percent of to civil law and to commercial matters. Among the most GDP in 2015, under control. important changes in a commercial context are: changes to corporate structure and the liability of corporate It will take time for the administration’s policies to board members, new rules on choice of law provisions bear fruit. The elimination of currency restrictions was in contracts, and choice of jurisdiction provisions. The followed by an immediate depreciation of over 29% in new code reduces the statute of limitations for bringing the peso, which will complicate efforts to rein in inflation. lawsuits from ten to five years. The new code incentivizes Meanwhile, reducing the budget deficit, which has grown arbitration, except when the public interest is affected. to 5.4% of GDP, means austerity, which is likely to dampen growth until 2017. The Peronist parties that still control 35 Supreme Court invalidates law allowing political The contract was the largest energy investment deal appointment of replacement judges. A law adopted in Argentina with joint investments likely to total some in June gave the council of magistrates, which appoints US$15 billion. Foreign investment is needed to exploit and removes judges, additional powers to replace judges Argentina’s shale resources. Opposition lawmakers had on courts, and provided that the replacements did not claimed that secret clauses in the contract would harm need to be judges. The council, with a strong government the Argentine national interest. The Supreme Court said majority, removed a sitting judge from the federal court that the state company cannot deny public access to this of cassation just as the court was about to rule on the information. constitutionality of a controversial 2013 treaty with Iran. The judge was replaced with a pro-government lawyer. Law renationalizes Argentina’s Rail System. In May, In November, the Supreme Court ruled that the new a law re-nationalized Argentina’s railway system. The appointments law was unconstitutional. The ruling will rail network was privatized in the early 1990s under help the Argentine judiciary maintain its independence. President Menem. Split into concessions and sold to private companies, the system saw a drop in passengers, Case of prosecutor’s death remains unclear, but court revenues and lines. In 2013 the Attorney General revoked rejects allegations of government involvement. In the concession held by ALL, a Brazilian company, for January, special prosecutor Alberto Nisman, who was noncompliance. During recent years various parts of the investigating allegations that the government covered rail system have been nationalized and privatized in waves up Iranian involvement in the 1994 bombing of a Jewish as the government tried to reconcile the political and community center, filed a 300-page complaint accusing financial challenges of providing national service. the president and foreign minister of complicity in the affair. A few days later, just before he was supposed to ICSID appeals committee rejects request to annul present his evidence to the court, Nisman was found pro-Argentina ruling. In January, an International Centre dead in his apartment under mysterious circumstances for Settlement of Investment Disputes committee that have never been completely addressed. In March, dismissed Daimler Financial Services’ request to annul a judge dismissed Nisman’s complaints against the a 2012 ICSID ruling. Daimler had argued that economic president and foreign minister and an appeals court measures adopted by Argentina to address the 2001- upheld the dismissal. 2002 financial crisis harmed its business and violated a bilateral investment treaty with Germany. The ICSID panel U.S. court rules Argentine creditors cannot seize concurred with Argentina that it had no jurisdiction to assets of central bank. In August, the U.S. Second Circuit arbitrate and that Daimler would have to go through the Court of Appeals ruled that the Argentine central bank’s Argentine court system as provided in the Argentina- assets cannot be seized by creditors holding Argentine Germany bilateral treaty. debt. Reversing a trial court decision, the appeals court determined that, though the government of Argentina Argentina raises minimum wage. In July, the minimum waived its sovereign immunity when it issued debt in monthly wage in Argentina was increased to US$ 610 1994, the operations of the central bank—and other state from US$ 515. Betting that the increase will stimulate entities like the oil exploration company—are sufficiently consumer purchasing and not raise product prices, the autonomous as not to be covered by that waiver. As a Minimum Wage Council approved a two-step increase— result of the decision, the bank and its U.S. partner banks the first beginning in September and the second to follow can make interest payments on current debt—ending in January. a state of technical default caused by the lower court decision. The appeals court decision represents the New data protection regulations for Do Not Call latest move in a long-running battle between Argentina registry and CCTV adopted. In February, Argentina’s and bondholders. A group of bondholder funds including Data Protection Authority issued regulations to boost several U.S. hedge funds have refused exchange offers private data protection and prevent abusive marketing to and continue to pursue damages from Argentina’s 2001 consumers. The new measures include fines for failure default. to observe current personal data processing and Do Not Call regulations, as well as required notice and consent Argentine court orders YPF to disclose details of shale provisions for the use of closed circuit TV data. exploration contract with Chevron. In November, the Supreme Court ordered the state energy company, Argentina targets companies operating in the Falkland YPF, to make public the terms of its 2013 contract with Islands/Malvinas. In June, a court in Argentina’s Tierra Chevron to develop the Vaca Muerta shale formation. del Fuego province ordered the seizure of US$156 million

36 and confiscation of ships and other assets belonging BUSINESS ENVIRONMENT to the Noble Falkland Islands Ltd. and oil companies conducting activities on the continental shelf surrounding The new administration of President Macri promises to the Falkland Islands/Malvinas which are claimed by be substantially more business-friendly than the outgoing Argentina. The company had not responded to the Peronist government. There is considerable room for court’s request for information about its oil exploration improvement. Argentina ranks 121st out of 189 countries activities in the area which the Argentine government in ease of doing business by the World Bank. In surveys has denounced as illegal. The Argentine government has of corruption perceptions it ranks in the third quartile, targeted a consortium of foreign firms, including three and dropped in the most recent rankings. Agents report British companies (Rockhopper Exploration, Premier fairly little confidence in the rule of law, and a surprisingly Oil and Falkland Oil & Gas); one U.S. firm (Noble Energy); high number of survey respondents report having been and one Italian firm (Edison International) for their oil victims of crime. Argentina rose in a recent ranking of exploration work undertaken under permits granted by economic freedom, but from an exceptionally low level. the Falkland Islands government. Of the companies, only Noble Energy had a presence within Argentina.

37 BRAZIL▼ Figure 1. Brazil’s public debt-‐to-‐GDP ra:o is rising • Brazil’s economy is in recession and its political system is in crisis.

• Consumer and business confidence have plummeted.

• A wide deficit and growing public debt leave no room to use fiscal policy to stimulate the economy.

Brazil’s economic woes began before the end of the commodity supercycle. Capital inflows — attracted by growth that had averaged 4.5% during 2004-10 — led to a 99% rise in Brazil’s real effective exchange rate between the beginning of 2004 and July 2011. As Brazil’s exports became less competitive and fell off, GDP growth decelerated. Inflation picked up, receiving a boost from ill-considered interest rate cuts and a rapid expansion of credit to businesses and consumers, much of it by public banks. Government spending, which increased before Dilma Rousseff’s election to a second four-year term and continued to rise thereafter, led to a widening public sector budget deficit. For 2015, the overall deficit is expected to reach almost 9% of GDP, and Brazil’s primary (noninterest) surplus has turned into a 0.5% deficit, putting Brazil’s public debt on an unsustainable path. Both S&P and Fitch have downgraded Brazil’s sovereign credit rating to below investment grade status.

Brazil’s policymakers are now in the position of having to tighten policy in a recession. To stabilize its public debt, the government announced spending cuts amounting to as much as 1.3% of GDP. To combat inflation meanwhile, the central bank has had to raise interest rates and keep LEGAL ENVIRONMENT them high. The 60% since its peak in April 2011. That depreciation will improve Brazil’s competitiveness and Petrobras scandal implicates politicians and help moderate the contraction of the economy. businesses. The Petrobras scandal began in 2014 with the discovery that the state oil company had received Efforts to address Brazil’s recession and fiscal problems bribes of around 3% and that other portions were used will be slowed by Brazil’s political crisis. First came a for secret political contributions. The scandal rocked massive scandal involving bribery at Petrobras, the state- Brazil, forcing a purge of Petrobras’ politically appointed controlled oil company (see below). Over 140 people leadership, and brought about the arrest and investigation have been charged with crimes, including politicians both of private companies and their executives and of and executives of some of Brazil’s leading businesses. numerous politicians. Among the most significant political Then came charges that the government had misused scalps is the treasurer of the ruling Labor Party and government funds by failing to reimburse public banks former President Lula da Silva’s cabinet chief, who had making payments on its behalf. Congress has initiated already been convicted in the earlier mensalão corruption impeachment proceedings against President Dilma scandal. Rousseff on these charges, which would not likely have been deemed serious enough to warrant impeach-ment Brazil offers leniency deals to companies in Petrobras in the past. Ms. Rousseff, however, is unpopular: Her scandal. Using a new legal anti-corruption tool available approval rating has slipped to nine percent. since 2014, Brazil’s comptroller is offering leniency agreements to private companies embroiled in the 38 Petrobras corruption scandal. Companies who admit for mediation panels to handle disputes with federal, wrongdoing, pay fines, and set up corruption prevention state and municipal governments, but also allows for practices will remain eligible for public contracts. private mediators. Finally, the new act also provides for Petrobras suspended business with many suppliers who the mediation of disputes inside and among government are under investigation for bribery and collusive pricing. agencies. The government hopes that Petrobras will resume business with cleared entities, unblocking resources that Amendments to arbitration law approved. In May, could affect as many as 51,000 companies. There are important changes to Brazil’s arbitration law entered concerns that the wealthy and well-connected will not be into force. The law reinforces and encourages the use held accountable for their misdeeds. Critics also wonder of arbitration, allows arbitrators to issue partial awards, whether companies who benefit from the leniency will upholds corporate arbitration and allows a court to set cooperate with the investigations. The ultimate impact of aside arbitral awards on appeal. Provisions involving the new plea bargaining policy is uncertain because these arbitration in consumer and labor relations were vetoed legal options are new to Brazil. by the president.

Petrobras draws attention of the Securities and Brazilian Supreme Court bans corporate donations Exchange Commission and U.S. lawyers. Petrobras is to political parties. Corporate donations to political being sued by the state of Ohio which argues that the parties, hitherto allowed to be 2% of a company’s company has defrauded investors. The state pension annual gross revenue, were declared unconstitutional fund claims it suffered losses as a result of Petrobras’ by the Brazilian Supreme Court on September 17. The declining share value, which was in turn precipitated national bar association challenged the electoral laws by Brazil’s corruption scandal. The U.S. Securities claiming they allowed for corporate manipulation of the and Exchange Commission opened investigations of electoral process. A dissenting justice, however, argued Petrobras activities and subpoenaed the company in that restricting legitimate funding would silence parties November 2014 for information about its activities in that played by the rules. Others argue that it would leave relation to corruption investigations. Petrobras is subject parties to turn to bribery. In 2014, corporations provided to U.S. jurisdiction because its shares are traded on U.S. nearly $800 million for the elections while contributions by exchanges. individual donors totaled less than $130 million.

New corruption charges target presidential allies. Brazil adopts new code of civil procedure. When Law In addition to the problems caused by the Petrobras No. 13.105/2015 takes effect in March 2016, the new scandal, the electoral court voted in October to reopen Code of Civil Procedure will replace the current code that a criminal investigation about the use of illegal funds dates from 1973. A new code is intended to simplify and by the ruling coalition in the 2014 presidential election. streamline court proceedings, and to encourage alternate The allegation is that the Labor Party received large dispute resolution methods. The code will reduce the contributions from companies being investigated number of interlocutory appeals that could be filed during under the Petrobras corruption scandal. In July, federal a proceeding, with most issues saved for final appeal. prosecutors launched new investigations about Judges will need to address the arguments of both sides corruption in the former administration of President in their rulings. Judges also will encourage mediation Lula da Silva, involving promotion of Brazil’s Odebrecht efforts by parties, with courts obliged to establish construction company in African and Caribbean projects. consensual mediation centers. Finally, the attorney general also brought corruption charges against Eduardo Cunha, president of the lower house of Congress who is not considered an ally of the Brazil adopts new mediation law. A new mediation act, president. adopted in June, takes effect on December 25, 2015, and is intended provide a comprehensive framework Brazil proposes new privacy law. The first draft of a for alternate dispute resolution. The act sets out privacy law released in July raised concerns that the law the requirements and standards for mediators and could jeopardize commercial activities in the tech sector conciliators operating in Brazil, and outlines the process and data processing businesses, thus harming consumer for mediation. Importantly, the new act allows parties privacy. Analysts point out that definitions for key terms to suspend litigation during the course of mediation, such as “personal data”, “prior consent”, and “jurisdiction” and provides that procedural deadlines also will be may be too broad. Critics argue that the law could cause suspended while mediation continues. The act provides excessive restrictions on data transfers; that its joint

39 liability clause may be better suited to private agreements; Companies focus on compliance policies in the face and that the need for a new regulatory agency is of Brazil’s anti-corruption crackdown. Brazil’s new questionable. The draft law will be subject to rewriting and anti-corruption statute, the Brazilian Clean Companies it is expected to take two years before becoming law. Act, adopted in 2014, credits corporate entities for compliance policies and practices. New regulations issued Brazil raises taxes on financial firms. In September, in March address how authorities will evaluate corporate Brazil’s senate approved legislation to raise the tax on compliance programs, their policies covering interaction financial firms’ profits to 20% for the next three years, with government officials, and the transparency of after which the rate will return to the current 15%. The corporate actions in the political arena. Brazil’s Foreign revenue raised from institutions, including banks and Corrupt Practices Act, signed into law in 2013, also is brokerages, is projected to be R$4 billion by 2017. Experts being vigorously applied by prosecutors investigating predict that the tax increase will lead to a reduction of corruption. Companies would be well-advised to loans issued and repayments made. monitor their “anti-corruption risk profiles” and audit implementation of their compliance programs. Rio de Janeiro becomes first city in Brazil to ban Uber. In September Rio de Janeiro’s city council passed legislation banning smartphone-based ride-hailing BUSINESS ENVIRONMENT applications, and Mayor Eduardo Paes signed the bill on September 29. São Paolo rejected a similar approach, Despite the bribery scandal at Petrobras, survey choosing to regulate Uber as a kind of taxi service. respondents report that perceptions of corruption and Brasilia also rejected a call to ban the service outright. the rule of law are improving in Brazil. Overall, the ease Uber presents itself as a solution to job creation and of doing business in Brazil also has improved, according to transportation shortages. However, the ridesharing to the World Bank, though Brazil is still in the bottom service is controversial in Brazil, provoking large protests half of the rankings. That improvement comes despite from traditional taxi drivers. In addition to Rio and São a deterioration in some subcategories of the rankings, Paolo, 13 other Brazilian municipalities have considered such as the number of tax payments required per year legislation to ban the service. and the corporate tax rate, and in the country’s ranking on economic freedom. Reported crime victimization in Brazil, meanwhile, is one of the highest in Latin America.

40 CHILE = Figure 1. Copper prices have trended down • The decline in copper prices slowed Chile’s growth to a below-potential rate.

• The central bank hiked interest rates to keep currency depreciation from fueling inflation.

• President Bachelet’s proposals for reform have lagged.

Chile managed to avoid a recession in 2015 despite a 51% decline in the price of copper since February 2011. Copper accounts for 54% of the country’s exports. During the past year increases in government spending and in business investment, plus a 25% decline in the peso have helped offset the external shock. But some of the currency depreciation has passed through into higher inflation. To keep inflation within its 2% to 4% target range, the Banco Central de Chile (BCCh) raised its short- term policy rate to 3.25% in October. Inflation slipped to 3.9% in November, but is likely to rise again and will be met with another rate hike if it does. Because government revenues are dependent on copper, the drop in copper prices has affected Chile’s fiscal balance. The deficit increased from 1.6% of GDP in 2014 to 3% in 2015. Some fiscal tightening can be expected in 2016. Both Chile’s inflation and its fiscal deficit, however, are manageable. The consensus view is that the BCCh will be able to hold inflation below 4% for 2016, while Chile’s access to international capital markets means that it will be able to finance its government deficit without difficulty.

After some initial success, President Bachelet’s push for LEGAL ENVIRONMENT the wide-ranging reforms she had proposed during the 2013 presidential has lost momentum. Her proposals include reforms to education, labor relations, tax policy, ICJ ruling a blow to Chile. In September, the and the constitution. International Court of Justice rejected Chile’s argument that it was without jurisdiction to consider Bolivia’s claims President Bachelet remains committed to reforms that Chile had failed to provide sovereign access to the that will reduce Chile’s income inequality. But the weak Pacific Ocean under treaties signed since 1904. The issue economy and a corruption scandal involving allegations of ocean access has long embittered relations between of influence peddling on the part of her son sent Ms. the two countries. Bachelet’s approval rating down to 20% in September, from a high of 44% in January 2015. It has since recovered Chile passes new foreign investment law. In June, to 24%. Ms. Bachelet’s party, the Nuevo Mayoría, has a Chile adopted a new foreign investment aw, replacing majority in both the Senate and Chamber of Deputies but Chile’s 1974 law. The law supports the development of the President’s popularity remains low enough to suggest a national investment policy. A committee of ministers further progress on the proposed reforms will be slow and and an investment promotion agency will be created to uneven. implement the policy. When the law takes effect in 2016, it will facilitate investment by guaranteeing access to foreign exchange markets. Current investors may keep contracts signed under the 1974 legislation, the terms of which will also be available to new investors under certain conditions. 41 President Bachelet pushes new constitution project. Water conflicts emerge. In March, a Chilean court ruled In October, President Bachelet began pushing for a new that Antofagasta, a mining company, must remove part of constitution to replace the current document drawn up a waste dam wall which restricted water flow from the Los in 1980 during the Pinochet dictatorship. Constitutional Pelambres mine site to the nearby town of Caimanes. This reform was one of President Bachelet’s main electoral decision came after an October 2014 Supreme Court pledges prior to her election in 2013. The reform project ruling that the company needed to allow some water flow will begin with a civic education phase running through or remove the dam. The ruling had little impact on the March 2016, and ultimately be submitted to Congress in company’s production and share prices but the protests 2017. Any reformed constitution would be considered and resulting court decisions may reflect increasing the by the next Congress in 2018, which would also need importance and risks of water rights conflicts. to decide a mechanism for its approval. Options for the approval could include: 1) a bicameral commission of Chile approves civil unions for unmarried and same- senators and deputies; 2) a mixed commission made sex couples. In January, Congress approved a law up of citizens and legislators; 3) an elected constituent providing for civil unions that will provide many of the assembly; or 4) a plebiscite in which the electorate would attributes of marriage both to same-sex and unmarried be asked to decide which of the first three options it heterosexual couples. prefers.

Education law passes. In January, Congress approved BUSINESS ENVIRONMENT a major part of President Bachelet’s education reform initiative. The new law will end for-profit education in any Other than the increase in the corporate tax rate, which school which receives public funding and eliminate stu- is being phased in over four years, the past year saw little dent selection by schools. The new law also abolishes the change in Chile’s business climate. It remains one of the traditional system of education financing which had been most business-friendly countries in Latin America, ranked divided between the government and payers of school second only to Mexico in the World Bank’s latest ease of fees. The costs of the education reform will be borne by doing business ratings. In perceptions of corruption, Chile the government and funded by increases in corporate is ranked 21st in the world, just below Hong Kong, Ireland, taxes. and the United States in Transparency International’s most recent rankings.

42 PARAGUAY▲ URUGUAY▲

After expanding by 13% in 2013, Paraguay’s GDP growth Although growth has slowed since 2011, reflecting slowed to a 4.4% rate in 2014, and is estimated to have weakness in many of its main agricultural export markets, fallen to 3.5% in 2015. Low soybean prices especially Uruguay nonetheless has avoided recession. President have hurt the value of one of the country’s key exports. Vazquez toned down his rhetoric on Venezuela’s political Inflation remains modest, declining from 4.2% in 2014 situation in order to negotiate an important deal to export to an estimated 3.4% in 2015. President Cartes had beef to that country. Modest declines in the value of the made fighting corruption a key campaign promise, but peso have helped to maintain its rough parity with its prominent scandals involving the national police and the Mercosur neighbors. Uruguay’s inflation rate, which ran office of the comptroller general highlight the challenges at a fairly high rate during 2009-2014, increased to and Paraguay faces. estimated 8.9% in 2015. Uruguay had managed to run a fiscal surplus until 2014, but ran a small primary deficit of Freedom of information law takes effect.Paraguay’s 0.1% of GDP in that year. The overall government deficit new freedom of information law, originally adopted worsened to 2.3% of GDP in 2014. The Banco Central del in 2014, took effect in September. The law requires Uruguay held interest rates at 9.25% in 2015. government agencies to make public information on their budgets, payroll, contracts and other financial reports. New media law enacted. In December 2014, Uruguay The law provides a mechanism for public requests for adopted a new media law. The new law ends monopolies information, other than information classified as secret, in the media sector by limiting the number of television which must be addressed within a 15-day period. licenses available. The law also introduces a requirement that at least 60% of television programming must Paraguay refuses to acknowledge $85 million debt be nationally produced, and makes other provisions from dictator’s time. In September, Foreign Minister regarding quotas for the content of production. Finally, Eladio Loizaga confirmed Paraguay’s pre-2012 position the law requires free political advertising to parties based that the Paraguayan government has no responsibility to on their performance in previous elections. repay a $85 million debt incurred by Gustavo Gramont Berres, consul in Geneva in 1986-87, with the Overland Social security treaty with U.S. signed. In May, the Trust Bank. This reverses former President Federico U.S. and Uruguay agreed to a social security treaty under Franco’s 2012 agreement to repay the loan in part to which retirement benefits of nationals of each country, unencumber funds blocked in a Swiss bank account. who worked as expats in the other country, would be In 2005, Swiss courts determined that the Paraguayan based in part on the years worked in the host country. government was liable for the debt. Gramont Berres had no legal authority to negotiate the loan for the Uruguay’s business climate remains better than Paraguayan government and used a forged guarantee in average. It is ranked 92 in the World Bank’s latest ease of order to secure the loan for an agricultural facility and a doing business ratings, and is in the 76th percentile rank pharmaceutical plant, neither of which was subsequently for rule of law in the World Bank’s governance indicators. built. In perceptions of corruption it is tied with Chile at 21st in Transparency International’s rankings. Paraguay saw a modest improvement in its business climate. It is ranked 100 in the World Bank’s latest ease of doing business ratings. In perceptions of corruption, Paraguay is ranked 150th in the world in Transparency International’s 2014 rankings. In Latin America, only Haiti and Venezuela are ranked lower in the Corruption Perception Index. Paraguay dipped slightly in the Economic Freedom Index, ranking 83rd, modestly higher than the hemispheric average.

43 44 TABLES

Table 1 GDP GROWTH, 2006-2016

Table 2 ANNUAL INFLATION, 2006-2016

Table 3 EXPORTS, IMPORTS & CURRENT ACCOUNT BALANCE, 2011-2016

Table 4 TERMS OF TRADE, 2006-2014

Table 5 NET FOREIGN DIRECT INVESTMENT, 2006-2014

Table 6 TOTAL GROSS EXTERNAL DEBT, 2007-2016

Table 7 TOTAL GROSS EXTERNAL DEBT AS PERCENTAGE OF IMPORTS, 2009-2016

Table 8 TOTAL EXTERNAL DEBT AS PERCENTAGE OF GDP, 2006-2016

Table 9 FISCAL BALANCE, 2009-2014

Table 10 CURRENCY REGIMES & EXCHANGE RATES

Table 11 COUNTRY RISK & IMF RELATIONS

Table 12 SOCIAL ENVIRONMENT

Table 13 POLITICAL ENVIRONMENT

Table 14 LEGAL ENVIRONMENT

Table 15 BUSINESS ENVIRONMENT

1 2.8 2.2 3.4 3.8 3.3 4.0 2.2 4.4 2.6 4.9 0.4 2.3 3.5 3.2 3.4 4.3 5.9 -‐4.1 -‐0.2 -‐2.5 2016f

1 2.4 2.1 2.8 1.1 3.5 2.6 4.1 2.0 4.4 2.9 5.8 0.5 2.3 3.7 2.5 3.4 4.1 5.8 -‐8.3 -‐3.5 2015e

2.4 2.9 3.9 6.1 4.6 5.3 3.4 4.4 5.1 5.2 4.1 4.8 5.4 4.2 2.0 3.7 2.1 3.6 3.7 8.4 '06-‐'14 '06-‐'14 Average Average

2.2 1.9 2.4 0.5 4.4 0.1 3.5 5.4 3.5 1.1 4.6 7.3 3.8 2.0 4.2 2.7 3.1 4.7 6.2 -‐4.0 2014

1.4 1.3 4.2 5.8 2.9 2.7 3.4 6.8 5.1 2.7 4.9 4.8 4.6 1.8 3.7 4.2 2.9 4.5 8.4 14.2 2013

4.0 5.6 5.5 6.0 0.8 1.8 5.2 5.2 3.3 3.0 4.0 2.6 5.2 1.9 3.0 2.9 4.1 5.1 -‐1.2 10.2 2012

3.9 4.2 5.8 6.5 8.4 4.3 3.9 4.5 5.2 5.2 2.8 6.6 2.8 7.9 2.2 4.2 5.5 3.8 6.2 10.8 2011

5.2 5.8 8.5 9.5 7.6 5.0 4.1 7.8 2.4 4.0 8.3 3.5 1.4 2.9 3.7 3.2 5.9 -‐1.5 -‐5.5 13.1 2010 Table 1 1 Table

1.0 0.1 3.4 4.2 1.5 1.7 0.9 0.6 0.5 3.1 4.0 -‐4.7 -‐3.2 -‐1.0 -‐4.0 -‐0.2 -‐1.0 -‐0.1 -‐2.4 -‐2.8 2009 Annual Growth Rates Rates Annual Growth

GROSS DOMESTIC PRODUCT PRODUCT DOMESTIC GROSS 1.4 9.1 5.3 3.1 3.7 6.4 5.0 6.1 2.7 7.2 4.1 3.5 3.1 6.0 1.3 3.3 0.8 4.2 2.9 9.1 2008

3.2 8.5 8.8 8.0 4.6 5.4 6.0 4.6 7.9 6.5 7.3 6.9 8.5 2.2 3.8 6.3 3.3 6.2 5.3 12.1 2007

5.0 7.5 9.9 8.4 4.6 4.8 4.0 4.8 8.8 4.1 6.7 4.4 3.9 5.4 2.3 6.6 4.2 8.5 12.1 10.7 2006

Forecasts are from Consensus Economics, except for Haiti, which are from the IMF, and Cuba, which are from the EIU ©Reproduced by permission of The Economist Intelligence Unit and Cuba, which are from the EIU ©Reproduced by permission of Forecasts are from Consensus Economics, except for Haiti, which the IMF, ECLAC 2015 Statistical Yearbook for Latin America and the Caribbean; IMF World Economic Outlook, 2015; Bloomberg; and EIU. America and the Caribbean; IMF World for Latin Yearbook ECLAC 2015 Statistical 1 REGION NAFTA Mexico SOUTH AMERICA ANDEAN Peru Venezuela CONE & SOUTHERN BRAZIL ArgenEna Chile CENTRAL AMERICA & CARIBBEAN SOURCE:

Paraguay Brazil Bolivia Costa Rica Uruguay Cuba Colombia

Dominican Republic Ecuador El Salvador Guatemala HaiE Honduras Nicaragua Nicaragua Panama

1 4.2 6.1 5.9 3.4 1.6 3.4 3.3 5.2 4.1 3.5 3.2 8.0 3.3 3.1 5.0 2.4 6.6 3.9 31.8 179.2 2016f

1 3.4 4.7 4.4 0.2 2.9 2.4 4.2 6.5 4.0 4.0 8.9 0.6 2.4 4.1 0.9 4.4 10.3 26.7 10.4 184.2 2015e

5.7 8.0 7.7 3.5 2.7 5.1 4.0 6.5 3.8 4.0 3.0 5.3 7.6 6.8 5.3 6.2 4.1 5.4 32.4 11.0

Av. '06-‐'14 '06-‐'14 Av.

4.2 6.4 6.5 4.7 0.5 2.9 4.1 5.2 3.7 3.7 3.2 6.4 8.3 5.1 1.6 5.8 1.0 5.3 65.9 23.9 2014 3.7 3.4 5.4 2.6 0.8 4.4 4.0 6.5 1.9 3.8 2.9 5.9 8.5 3.7 3.9 4.9 3.7 6.0 56.2 10.9 2013

4.0 7.6 1.6 1.5 0.8 3.4 3.6 4.5 2.4 5.2 2.6 5.8 7.5 4.5 3.9 5.4 4.6 5.5 19.5 10.8 2012

4.2 7.8 6.1 3.5 5.1 5.7 1.9 6.0 3.1 3.7 4.0 9.5 5.4 7.4 3.5 7.5 5.0 5.2 4.8 24.0 2011

7.2 6.2 9.1 3.0 2.1 5.4 4.4 7.2 3.2 3.5 2.1 5.9 6.9 5.8 6.3 6.5 4.9 n/a 27.4 10.9 2010

Table 2 2 Table 1.9 2.1 1.8 3.6 0.3 2.0 6.0 0.2 7.7 4.3 5.9 4.0 5.7 3.0 1.9 n/a -‐1.4 -‐0.2 -‐0.3 26.9 2009 ANNUAL INFLATION INFLATION ANNUAL

7.5 6.5 7.7 6.1 6.7 7.2 5.9 7.1 9.2 4.5 5.5 9.4 6.8 n/a 31.9 17.0 12.7 11.8 13.9 10.8 2008

6.0 9.3 3.8 5.7 1.6 3.9 8.5 4.5 7.8 8.5 8.9 4.9 8.7 8.9 6.4 n/a 22.5 16.2 11.7 10.8 2007 (Percentage variaTon in CPI, December through December) through December) December CPI, in variaTon (Percentage

4.1 4.9 4.5 2.0 1.1 9.8 3.1 2.6 6.4 9.4 5.0 4.9 5.8 5.3 2.2 n/a 17.0 12.5 10.2 10.2 2006

Forecasts are from Consensus Economics, except for HaiE, are from the IMF, and except for which Cuba, which Economics, are from Forecasts are from Consensus the EIU ©Reproduced by permission of The Economist Intelligence Unit.

REGION NAFTA Mexico SOUTH AMERICA ANDEAN Bolivia Colombia Ecuador Peru Venezuela CONE & SOUTHERN BRAZIL ArgenEna Brazil Chile Paraguay Uruguay CENTRAL AMERICA & CARIBBEAN Costa Rica Cuba Dominican Republic El Salvador Guatemala HaiE Honduras Nicaragua Panama SOURCE: Outlook, 2015; Bloomberg; and EIU. ECLAC 2015 StaEsEcal Yearbook for LaEn America and the Caribbe an; IMF World Economic 1

47 n/a n/a n/a n/a n/a n/a n/a n/a n/a -‐222

-‐2,400 -‐2,400 -‐7,800 -‐5,900 -‐8,100 -‐2,900 -‐1,500 -‐4,400 -‐33300 -‐15,500 -‐15,500 -‐42,200 C/Account C/Account

1 n/a n/a n/a n/a n/a n/a n/a n/a n/a 64,861 24,398 42,234 41,920 74,282 74,104 19,199 18,951 27,525 452,639 228,701 2016f Imports

n/a n/a n/a n/a n/a n/a n/a n/a n/a

49,061 20,881 42,534 42,659 74,994 73,848 19,942 17,196 25,999 225,477 Exports 425,311 425,311

n/a n/a n/a n/a n/a n/a n/a n/a n/a 101

-‐2,900 -‐2,900 -‐7,900 -‐9,700 -‐2,300 -‐1,200 -‐4,500 -‐32800

-‐19,000 -‐19,000 -‐11,900 -‐64,800 C/Account C/Account

1 n/a n/a n/a n/a n/a n/a n/a n/a n/a 65,471 25,014 41,282 44,671 74,282 72,644 17,751 18,835 29,588 432,963 247,219 Imports 2015e

n/a n/a n/a n/a n/a n/a n/a n/a n/a

46,261 20,540 39,569 42,761 72,133 74,420 18,553 16,500 26,306 227,225 Exports 405,836 405,836

10 20 -‐601 -‐552 -‐838 1,996

-‐8,030 -‐8,030 -‐5,641 -‐2,993 -‐2,511 -‐2,429 -‐2,026 -‐1,194 -‐1,387 -‐1,444 -‐5,257 10,894 -‐24,983 -‐24,983 -‐19,549 -‐103,597 -‐103,597 C/Account C/Account

4,559 6,983 12,988 75,115 30,227 48,157 57,532 79,523 82,631 13,055 14,494 17,014 15,411 20,107 10,950 20,080 10,293 28,242 2014 435,289 318,698 Imports

6,482 1,655 6,598 5,010 13,494 63,846 28,938 45,080 75,780 85,835 86,642 13,870 13,671 15,946 18,749 16,964 13,736 26,095 418,854 264,541 Exports

614 -‐983 -‐535 1,054 5,327

-‐8,473 -‐8,473 -‐4,846 -‐2,825 -‐2,486 -‐1,042 -‐2,537 -‐1,574 -‐1,351 -‐1,763 -‐1,200 -‐4,918 -‐30,469 -‐30,469 -‐12,367 -‐90,908 -‐10,127 C/Account C/Account

4,419 6,873 11,061 69,903 29,704 49,214 72,842 88,988 90,511 12,930 14,849 16,494 17,096 19,562 11,099 19,116 10,074 28,905 2013 413,766 325,858 Imports

Table 3 3 Table

6,422 1,567 6,259 4,617 12,753 67,140 27,715 48,025 91,159 96,338 88,929 14,373 13,738 15,216 19,370 15,874 12,714 26,986 (Millions of Dollars) of Dollars) (Millions 400,844 281,161 Exports

-‐165 -‐231 -‐256 -‐448 1,970

-‐5,236 -‐5,236 -‐1,575 -‐9,626 -‐2,593 -‐2,408 -‐3,971 -‐1,288 -‐1,310 -‐1,581 -‐1,113 -‐3,528 11,016 -‐16,364 -‐16,364 -‐11,306 -‐84,446 C/Account C/Account

9,919 4,195 6,837 68,892 27,717 47,736 77,503 83,175 90,588 11,941 14,689 16,350 15,935 20,612 10,496 18,377 10,270 29,821 2012 401,859 304,088 Imports

6,102 1,328 6,667 4,735

12,258 68,034 26,376 51,592 99,545 95,281 90,178 12,342 13,517 15,091 18,705 15,076 12,538 28,102 387,587 282,443 Exports

EXPORTS AND IMPORTS OF GOODS AND SERVICES AND CURRENT ACCOUNT BALANCE AND CURRENT SERVICES OF GOODS AND AND IMPORTS EXPORTS 77 110 -‐261 -‐326 1,438

-‐9,710 -‐9,710 -‐3,179 -‐4,007 -‐3,089 -‐1,315 -‐2,228 -‐4,359 -‐1,112 -‐1,599 -‐1,409 -‐1,155 -‐4,993 24,387 -‐13,229 -‐13,229 -‐73,180 C/Account C/Account

8,777 4,433 9,804 6,305 62,963 26,535 42,961 62,503 88,773 86,557 12,626 12,755 15,179 16,019 20,201 10,202 17,999 28,441 2011 381,584 302,394 Imports

9,123 5,879 1,312 6,231 4,170 63,898 24,670 49,941 94,804 99,452 94,543 13,300 12,916 13,821 18,259 14,184 12,757 25,096 365,586 294,249 Exports

2 EIU ©Reproduced by permission of The Economist Intelligence Unit. Forecasts are from Consensus Economics, except for HaiE, which HaiE, are for Economics, except from the IMF, and Forecasts are from Consensus Cuba, which are from the EIU ©Reproduced by permission of The Economist Intelligence Unit. an; IMF World Economic Outlook, 2015; Bloomberg; and EIU. ECLAC 2015 StaEsEcal Yearbook for LaEn America and the Caribbe an; IMF World Economic 1 2 NAFTA REGION REGION NAFTA Mexico SOUTH AMERICA ANDEAN Bolivia Colombia Ecuador Peru Venezuela CONE & SOUTHERN BRAZIL ArgenEna Brazil Chile Paraguay Uruguay CENTRAL AMERICA & CARIBBEAN Costa Rica Cuba Dominican Republic El Salvador Guatemala HaiE Honduras Nicaragua Panama SOURCE:

48 n/a 99.7 95.2 90.4 83.1 92.3 96.6 93.3 97.0 97.0 95.9 99.6 96.6 97.8 91.0 2014 112.9 111.5 109.9 103.3 111.8

n/a 97.7 91.3 88.6 80.6 91.8 96.2 91.5 96.1 99.3 92.2 2013 113.1 106.2 107.5 112.8 102.8 104.9 102.1 118.9 100.1

n/a 98.2 99.6 94.6 86.0 93.7 96.6 93.8 95.8 94.9 2012 111.7 111.9 105.7 114.8 101.6 103.4 105.0 107.2 121.4 106.3

n/a 97.8 99.6 83.0 99.1 94.7 96.3 2011 108.4 100.0 110.0 111.8 101.8 111.0 107.9 102.4 107.2 112.7 120.2 106.7 100.6

n/a 2010 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

n/a 99.1 97.3 90.8 88.4 96.9 88.4 86.2 92.9 84.7 84.1 81.7 2009 101.9 103.4 100.5 103.9 103.8 104.1 100.0 100.4

n/a 97.3 90.4 91.1 79.9 92.6 96.0 94.1 91.3 88.3 89.6 80.8 2008 100.6 102.6 102.8 100.8 102.3 104.6 115.5 105.2 Table 4 4 Table (2010=100) (2010=100) TERMS OF TRADE

n/a 94.5 97.0 95.1 93.5 92.6 88.7 90.1 85.2 95.3 93.6 92.9 92.0 2007 101.9 111.2 103.5 100.5 104.7 103.8 103.4

n/a 95.4 98.8 96.9 91.0 97.3 85.8 88.6 88.7 83.5 91.0 99.7 85.4 89.6 89.8 2006 102.9 114.4 104.5 105.7 102.9

Panama Nicaragua Nicaragua Honduras HaiE Guatemala El Salvador Ecuador Dominican Republic

Colombia Cuba Uruguay Bolivia Costa Rica

Brazil Paraguay REGION NAFTA Mexico SOUTH AMERICA ANDEAN Peru Venezuela CONE & SOUTHERN BRAZIL ArgenEna Chile CENTRAL AMERICA & CARIBBEAN SOURCE: America and the Caribbean 2015 Economic Survey of Latin

49 99 n/a 274 238 648 774 756 2014 1,000 4,495 7,789 2,209 9,950 1,365 1,838 2,741 1,120 4,351 17,594 66,035 12,155

72 n/a 176 160 731 992 708 2013 1750 4,888 9,161 1,990 8,956 1,262 2,474 8,547 3,027 4,373 31,488 10,204 67,491

n/a 756 484 738 156 585 851 715 2012 1060 3,142 7,902 1,205 1,915 2,539 3,254 -‐3,519 -‐3,519 14,269 11,840 68,093 15,646

n/a 218 557 859 119 644 930 2011 4,919 9,352 2,277 7,518 3,057 1,009 2,216 2,511 6,228 1,012 2,956 10,740 67,689

73 n/a 216 782 651 178 166 947 971 474 -‐226 2010 1,622 8,189 6,049 1,441 2,349 2,407 11,033 10,368 36,919

95 55 n/a 366 574 420 308 505 463 2009 2,165 8,075 6,020 3,306 6,159 1,339 1,512 3,789 1,259 -‐4,405 -‐4,405 36,033

30 n/a 143 824 209 509 608 2008 2,870 6,188 8,335 7,453 2,072 7,377 2,117 1,058 8,110 1,007 2,147 27,453 24,601 Table 5 5 Table

(Millions of Dollars) of Dollars) (Millions 75 n/a 202 363 720 194 926 366 2007 1,462 1,667 5,425 4,969 8,326 1,455 1,634 1,240 8,136 1,899 24,064 27,518 NET FOREIGN DIRECT INVESTMENT INVESTMENT DIRECT NET FOREIGN

n/a 267 114 278 552 161 271 669 266 2006 1,085 3,467 3,099 6,586 1,371 1,495 5,558 2,547 -‐2,666 -‐2,666 -‐9,380 -‐9,380 15,224

REGION NAFTA Mexico SOUTH AMERICA ANDEAN Peru Venezuela CONE & SOUTHERN BRAZIL ArgenEna Chile CENTRAL AMERICA & CARIBBEAN Dominican Republic SOURCE: America and the Caribbean 2015 Economic Survey of Latin

Brazil El Salvador Paraguay Bolivia Costa Rica Guatemala Uruguay HaiE Ecuador Cuba Colombia

Honduras Nicaragua Nicaragua Panama

3 n/a 26,577 2016f 12,183 34,815 66,977 27,165 22,663 15,899 14,621 20,137 16,979 321,867 108,210 113,568 148,310 354,594 160,058 5,953 9,094 5,210

3 25,759 2015e 30,663 64,378 26,032 21,172 15,574 14,258 19,653 15,635 292,285 103,595 122,601 142,636 344,010 151,552 9,277 5,851 1,827 8,443 5,035

2014 1,827 4,796 8,543 5,324 7,180 24,296 64,512 24,192 19,025 14,352 25,212 19,234 14,177 16,074 279,861 100,905 134,522 147,853 352,684 145,666

2013 1,562 4,724 7,756 5,131 6,709 91,923 18,801 60,823 22,862 17,307 12,231 24,653 17,654 13,238 14,919 254,747 127,515 141,076 312,517 130,724

2012 4,481 6,711 4,580 4,861 11,730 78,763 15,913 59,376 21,122 15,339 10,782 23,324 14,509 12,521 12,872 223,733 118,949 143,336 327,590 117,569

709 2011 4,263 6,298 3,864 4,208 75,903 15,210 47,977 98,895 18,345 14,021 10,858 22,716 10,919 10,670 11,625 208,972 110,745 142,492 298,204

n/a 354 2010 4,068 5,875 3,621 9,135 9,698 3,785 9,947 64,723 13,914 43,674 97,092 86,738 18,425 12,026 10,439 193,950 130,843 256,804

Table 6 6 Table n/a 2009 1,333 3,366 5,801 3,044 8,238 9,882 3,365 8,215 53,719 13,514 35,157 81,946 74,041 17,969 11,248 10,150 160,787 116,622 198,136 (Millions of Dollars) of Dollars) (Millions

TOTAL GROSS EXTERNAL DEBT EXTERNAL DEBT GROSS TOTAL n/a 2008 1,921 3,512 8,477 5,930 3,124 9,105 9,994 3,499 7,219 46,369 16,900 34,997 66,358 64,318 15,425 11,163 124,007 125,859 198,492

n/a 2007 1,627 3,385 8,276 5,403 2,731 8,444 9,349 3,190 6,556 44,553 17,445 33,239 56,256 55,733 14,864 10,909 125,494 125,366 193,159

2 4 Includes debt owed to the International Monetary Fund. EIU ©Reproduced by permission of The Economist Intelligence Unit. Refers to external public debt. University of Florida forecasts REGION NAFTA Mexico SOUTH AMERICA ANDEAN Bolivia Colombia Ecuador Peru Venezuela CONE & SOUTHERN BRAZIL ArgenEna Brazil Chile Paraguay Uruguay CENTRAL AMERICA & CARIBBEAN Costa Rica Cuba Dominican Republic El Salvador Guatemala HaiE Honduras Nicaragua Panama SOURCE: America and the Caribbean EIU 2015 Economic Survey of Latin 1 2 3 4

3 64 60 90 n/a n/a n/a n/a n/a n/a n/a n/a n/a 192 150 315 133 201 116 148 197 2016f

3 61 55 91 91 n/a n/a n/a n/a n/a n/a n/a n/a n/a 192 144 298 139 194 150 185 2015e

95 52 49 38 51 92 55 167 127 174 216 290 153 118 108 134 116 128 153 109 2014

51 49 36 42 90 55 97 97 142 107 163 204 267 102 119 115 106 127 107 134 2013

94 48 47 96 37 94 72 36 82 90 53 83 147 112 152 203 249 125 120 838 2012

98 43 63 84 29 78 67 40 78 81 55 69 97 52 139 137 180 236 102 124 2011 Table 7 7 Table (in percent) percent) (in

38 86 95 33 74 76 51 74 98 86 88 97 34 n/a 155 107 165 193 239 120 2010

TOTAL GROSS EXTERNAL DEBT TO EXPORTS TO EXPORTS EXTERNAL DEBT GROSS TOTAL 50 95 90 36 77 78 53 97 n/a 111 109 105 167 105 105 194 230 262 125 119 2009

2 4 Includes debt owed to the International Monetary Fund. Refers to external public debt. University of Florida forecasts The Economist Intelligence Unit. EIU ©Reproduced by permission of

REGION NAFTA Mexico SOUTH AMERICA ANDEAN Bolivia Colombia Ecuador Peru Venezuela CONE & SOUTHERN BRAZIL ArgenEna Brazil Chile Paraguay Uruguay CENTRAL AMERICA & CARIBBEAN Costa Rica Cuba Dominican Republic El Salvador Guatemala HaiE Honduras Nicaragua Panama SOURCE: America and the Caribbean EIU. 2015 Economic Survey of Latin 1 2 3 4

4 29 40 32 33 25 29 23 69 39 33 28 n/a n/a n/a n/a n/a n/a n/a n/a n/a 2016f

4 26 36 29 33 23 28 19 64 38 34 29 n/a n/a n/a n/a n/a n/a n/a n/a n/a 2015e

22 27 24 32 31 27 15 57 37 38 31 n/a n/a n/a n/a n/a n/a n/a n/a n/a 2014

21 25 24 20 30 29 23 14 47 18 41 36 55 32 36 29 18 50 40 32 2013

19 25 21 18 31 30 23 14 44 19 42 32 53 30 26 28 15 49 40 32 2012

18 26 23 19 28 31 26 12 39 15 39 26 46 29 24 33 10 49 41 32 2011

5 19 30 23 20 30 35 28 12 40 18 47 25 45 29 24 36 49 43 n/a 2010

19 33 23 22 29 21 31 12 43 19 59 28 48 30 23 39 20 44 40 n/a 2009 Table 8 8 Table

12 36 19 27 29 17 31 12 36 17 51 31 47 29 25 34 30 50 41 n/a 2008

12 41 21 34 33 23 38 14 32 20 63 32 47 32 26 39 27 56 45 n/a 2007 TOTAL EXTERNAL DEBT AS PERCENTAGE OF GDP PERCENTAGE AS EXTERNAL DEBT TOTAL

12 55 25 37 32 24 43 16 32 25 66 32 52 33 36 43 30 56 67 n/a 2006

2 1 EIU ©Reproduced by permission of The Economist Intelligence Unit. EIU ©Reproduced by permission of Refers to external public debt. America and the Caribbean for Latin Yearbook ECLAC 2014 Statistical University of Florida forecasts

REGION NAFTA Mexico SOUTH AMERICA ANDEAN Bolivia Colombia Ecuador Peru Venezuela CONE & SOUTHERN BRAZIL ArgenEna Brazil Chile Paraguay Uruguay CENTRAL AMERICA & CARIBBEAN Costa Rica Cuba Dominican Republic El Salvador Guatemala HaiE Honduras Nicaragua Panama SOURCE: America and the Caribbean; EIU for Latin Yearbook America and the Caribbean; ECLAC 2014 Statistical for Latin Yearbook ECLAC 2015 Statistical 1 2 3 4

53 -‐2.2 -‐0.4 -‐0.3 -‐4.4 -‐2.6 -‐2.9 -‐2.5 -‐1.6 -‐2.4 -‐4.6 -‐5.3 -‐1.6 -‐1.1 -‐2.4 -‐5.6 -‐1.9 -‐2.3 -‐6.4 -‐0.9 -‐4.4 2014

0.5 0.1 1.4 -‐3.0 -‐2.6 -‐2.7 -‐2.4 -‐1.9 -‐0.6 -‐4.0 -‐2.7 -‐1.8 -‐1.7 -‐2.3 -‐5.4 -‐2.1 -‐1.5 -‐5.8 -‐1.4 -‐7.9 2013

1.3 0.5 0.6 1.8 1.7 -‐2.2 -‐1.9 -‐5.2 -‐2.6 -‐4.9 -‐2.7 -‐1.8 -‐1.7 -‐1.7 -‐2.3 -‐4.4 -‐2.4 -‐1.9 -‐2.0 -‐6.0 2012

0.1 1.0 0.5 1.3 0.7 1.6 -‐1.9 -‐2.1 -‐2.5 -‐4.0 -‐1.1 -‐3.3 -‐2.4 -‐2.3 -‐2.8 -‐4.1 -‐2.8 -‐0.6 -‐1.6 -‐4.6 2011 Overall Balance Balance Overall

1 1.1 0.1 1.2 1.3 n/a -‐0.1 -‐2.7 -‐2.7 -‐3.6 -‐0.4 -‐0.1 -‐2.4 -‐1.7 -‐2.7 -‐3.9 -‐5.2 -‐3.3 -‐1.2 -‐1.6 -‐4.7 2010

1 0.1 n/a -‐1.4 -‐0.8 -‐3.5 -‐2.2 -‐5.0 -‐4.2 -‐1.7 -‐2.0 -‐1.5 -‐3.5 -‐3.7 -‐4.1 -‐3.4 -‐3.1 -‐1.5 -‐4.2 -‐1.3 -‐6.0 2009

0.6 0.6 0.8 n/a -‐2.5 -‐0.1 -‐1.2 -‐0.2 -‐1.0 -‐1.7 -‐2.8 -‐0.3 -‐0.7 -‐0.4 -‐3.1 -‐0.4 -‐0.1 -‐5.0 -‐0.5 -‐2.1 2014

1.5 1.0 0.0 1.0 2.0 1.5 0.6 0.9

n/a -‐1.4 -‐0.4 -‐0.8 -‐2.0 -‐1.4 -‐0.1 -‐2.9 -‐0.6 -‐4.5 -‐1.0 -‐5.8 2013

Table 9 9 Table 2.4 1.2 1.5 2.7 1.9 0.5 0.1 0.4 2.0 n/a -‐0.1 -‐2.8 -‐1.1 -‐2.2 -‐0.8 -‐1.4 -‐2.3 -‐0.9 -‐0.1 -‐4.3 2012 FISCAL BALANCE FISCAL BALANCE

(as percentage of GDP) of GDP) percentage (as 2.1 1.8 1.5 2.2 1.0 1.8 1.9 n/a -‐0.1 -‐0.1 -‐1.0 -‐1.8 -‐0.2 -‐1.1 -‐0.1 -‐0.3 -‐1.9 -‐1.3 -‐0.7 -‐3.2 2011 Primary Balance Primary Balance

1 2.3 1.2 0.1 1.2 1.4 0.1 2.1 1.6 1.3 1.8 n/a -‐0.7 -‐1.2 -‐2.1 -‐0.4 -‐1.2 -‐3.1 -‐1.8 -‐0.9 -‐3.7 2010

1 1.4 1.4 1.2 0.6 1.3 n/a -‐0.2 -‐1.6 -‐0.5 -‐3.7 -‐3.7 -‐0.7 -‐0.4 -‐1.2 -‐1.2 -‐1.3 -‐1.7 -‐3.5 -‐0.7 -‐5.3 2009

3 2 ECLAC 2013 Figures General government The Economist Intelligence Unit. General government. Source: EIU ©Reproduced by permission of

NAFTA NAFTA Mexico SOUTH AMERICA ANDEAN Bolivia Peru Venezuela CONE & SOUTHERN BRAZIL ArgenEna Chile CENTRAL AMERICA & CARIBBEAN Cuba SOURCE: America and the Caribbean for Latin Yearbook America and the Caribbean, ECLAC 2013 Statistical for Latin Yearbook ECLAC 2015 Statistical 1 2 3 Dominican Republic Panama Brazil El Salvador Paraguay Colombia Costa Rica Guatemala Uruguay Ecuador HaiE

Honduras Nicaragua

54 1.57% 0.00% 0.29% 0.00% -‐2.55% -‐0.26% -‐1.82% -‐4.45% -‐13.94% -‐28.62% -‐11.83% -‐36.15% -‐33.17% -‐13.21% -‐20.37% -‐18.25% -‐17.24%

3 % Change % Change

1 USD USD USD 6.89 3.38 6.29 3.98 7.62 17.14 29.75 45.57 21.41 57.03 27.84 698.75 531.08 13.265 5,821.9 3,329.45 Dec. 2015 Dec. 2015

1.0 7.6 USD USD USD 6.91 2.98 6.29 8.47 2.66 47.2 26.6 Dollar Exchange Rates Dollar Exchange 14.75 24.32 44.41 21.02 606.45 539.42 4,635.7 2,376.51 Dec. 2014 Dec. 2014

2 U.S. Dollar

Exchange Rate Anchor Rate Exchange InflaEon-‐targeEng framework Other InflaEon-‐targeEng framework U.S. Dollar InflaEon-‐targeEng framework U.S. Dollar Other InflaEon-‐targeEng framework InflaEon-‐targeEng framework InflaEon-‐targeEng framework Monetary aggregate target Other InflaEon-‐targeEng framework U.S. Dollar InflaEon-‐targeEng framework Other U.S. Dollar U.S. Dollar U.S. Dollar Exchange Regime Regime Exchange Table 10 10 Table Dual exchange rate

Exchange Rate Arrangement Arrangement Rate Exchange Free ﬂoaEng Stabilized arrangement FloaEng separate legal tender No FloaEng ConvenEonal Peg Crawl-‐like arrangement FloaEng Free ﬂoaEng FloaEng FloaEng Other managed arrangement Crawl-‐like arrangement separate legal tender No Crawl-‐like arrangement Crawl-‐like arrangement Crawl-‐like arrangement Crawling peg separate legal tender No CURRENCY REGIMES & EXCHANGE RATES RATES EXCHANGE & REGIMES CURRENCY

1 Currency

Peso Boliviano Peso US Dollar Sol Nuevo Bolívar Peso Real Peso Guaraní Peso Colón Peso Peso Colón Quetzal Gourde Lempira Córdoba Balboa http://www.eiu.com/default.aspx :

4 The Economist Intelligence Unit Arrangements and Exchange Restrictions Annual Report on Exchange IMF 2014 Bloomberg. 12/31/14 and 12/18/15 exchange rates. rates and a large black market. currently has 2 other official Venezuela

2 IMF RelaTons Macroeconmic outlook remains benign Strong economy, but challenging external environment Strong economy, Challenging circumstances program was a success First year of Fund-‐support The economic outlook remains favorable to strengthen private sector Need AwaiEng new CPI and GDP data Must strengthen macroeconomic policies External shocks led to slowdown n/a Issue: Macroeconomic vulnerabiliEes Key Requested new Flexible Credit Line Flexible Credit Line of $5.4 Billion New consultaEon since 2004 No ConsultaEon: Strong fundamentals but sEll solid growth ModeraEng, ConsultaEon: Growth is to stay unchanged ObjecEve to increase internaEonal reserves ConsultaEon: ConsultaEon: Economic performance to remain strong

Growth remains lackluster

87 n/a n/a n/a n/a 438 163 171 404 184 249 251 405 984 216 356 559 293 253 2270 December '15 '15 December

Sovereign Spread Spread Sovereign 79 n/a n/a n/a n/a 337 121 118 440 157 279 154 185 792 361 296 369 247 251 2245 Table 11 11 Table December '14 '14 December

B B+ B+ B+ A+ BB BB BB RD NR NR NR NR n/a BB+ BB+ CCC BBB BBB BBB-‐ Fitch Fitch BBB+ BBB+ COUNTRY RISK AND IMF RELATIONS RISK AND IMF RELATIONS COUNTRY

B B+ B+ BB BB BB BB NR NR NR NR NR BB-‐ AA-‐ Sdu BB+ CCC BBB BBB BBB S&P BBB+ BBB+

Country Risk Country

Ca B3 B2 B3 B1 A3 A3 NR NR Ba3 Ba3 Ba1 Ba1 Aa3 BA1 Caa3 Caa2 Baa2 Baa2 Baa3 Baa2 Moody's

Bloomberg IMF Country Pages: Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial team visits the country, staff A Agreement, the IMF holds bilateral discussions with members, usually every year. Articles of Article IV of the IMF's IMF Country Pages: Under Honduras Nicaragua Panama HaiE Bolivia Colombia Costa Rica Brazil REGION NAFTA Mexico SOUTH AMERICA ANDEAN Ecuador Peru Venezuela CONE & SOUTHERN BRAZIL ArgenEna Chile Uruguay CENTRAL AMERICA & CARIBBEAN Cuba El Salvador SOURCE: 1 2 the country's economic developments and policies. information, and discusses with officials Dominican Republic Guatemala

Paraguay

2 43 39 30 43 57 49.6 29.7 44.4 64.7 23.4 19.1 17.6 40.2 52.6 40.2 72.4 11.4 49.4 44.9 61.5 Internet Internet PenetraTon

5.2% 6.3% 4.9% 2.6% 7.5% 2.8% 4.2% 7.2% 3.2% 5.9% 4.2% 3.9% 7.5% 6.0% 7.0% 7.6% 4.1% 6.6% 14.9% 10.5% % 2 Unemployment Unemployment Rate

7.8 5.6 6 n/a n/a 40.7 40.7 40.9 18.0 30.7 33.6 23.9 32.1 17.7 23.2

% (2012) 37.1 (2011) 36.3 (2006) 54.8 (2010) 69.2 (2009) 58.3 (2012) 4.3 in Poverty in Poverty PopulaTon PopulaTon

5 44 49 71 79 98 98 82 67 41 50 68 65 113 102 125 111 115 129 132 168 HDI 2013 (World Rank) Rank) (World

42 n/a n/a 4 49.1 52.3 46.5 53.4 46.2 45.3 50.8 47.7 52.2 40.4 52.6 41.3 48.5 57.2 47.5 51.9 41.8 Income Income Inequality (GINI Index) Index) (GINI

3 1.3 1.0 3.9 3.2 2.2 1.2 1.1 6.1 1.8 1.6 2.7 3.1 2.2 1.2 3.2 4.5 1.3 -‐0.4 -‐0.6 -‐5.4 % GD P P/C P/C GD P (PPP) Growth Growth (PPP)

2 824 3,235 7,903 6,322 6,550 6,147 3,667 4,728 2,434 1,963 4,129 10,230 11,384 16,614 14,528 16,806 10,415 11,948 Table 12 12 Table 12,568.00 GDP (2013) 6,789 (2013) (PPP $US) $US) (PPP Per Capita Capita Per

SOCIAL ENVIRONMENT SOCIAL ENVIRONMENT

1 88 95 95.1 92.6 95.7 94.7 94.5 94.5 96.3 98.1 97.5 99.8 91.8 81.5 60.7 93.9 98.5 97.8 88.5 82.8 (% age 15+) 15+) age (% Literacy Rate Literacy

1 1.18 0.77 1.56 1.04 1.35 0.97 1.39 0.93 0.82 1.23 1.82 1.17 1.16 0.27 1.22 0.25 1.68 1.00 1.32 -‐0.15 % Growth Growth Avg. Pop. Pop. Avg.

1 6.7 3.3 4.8 6.1 8.7 5.9 3.7 10.8 46.7 15.9 30.4 29.3 43.4 17.5 11.0 10.5 14.9 10.1 121.7 204.3 (Millions) (Millions) PopulaTon

Factbook November 2015: Data refer to percentage of population aged 15 or older who can, with understanding, both read and write a shor t simple statement on their everyday life The CIA World World The CIA dollar has the same purchasing power in domestic economy as 1 U.S. economy. per capita (Purchasing Power Parity in $U.S.). 1 PPP Bank: GDP World American & the Caribbean 2015 ECLAC, Economic Survey of Latin and a value of 100 perfect inequality value of 0 represents perfect equality, A October 2015 IMF Regional Economic Outlook:The Gini index measures inequality over the entire distribution of income or cons umption. Human Development Report 2014:The Index (HDI) measures a country's achievements in three aspects of human development: longevity (life expectancy at birth), knowledge (combination literacy rate and enrollment ratio), UNDP, 2014 Yearbook ECLAC, Statistical Percent of urban population in poverty REGION NAFTA Mexico SOUTH AMERICA ANDEAN Bolivia Colombia Ecuador Peru Venezuela CONE & SOUTHERN BRAZIL ArgenEna Brazil Chile Paraguay Uruguay CENTRAL AMERICA & CARIBBEAN Costa Rica Cuba Dominican Republic El Salvador Guatemala HaiE Honduras Nicaragua Panama SOURCE & NOTES 1 2 3 4 5 in $U.S.). HDI rank is based on a total of 169 countries. per capita - PPP and a decent standard of living (GDP 6 7

57 Control of of Control Legislature Legislature

Govt. CoaliEon Government Govt. CoaliEon Govt. CoaliEon OpposiEon TBD OpposiEon Govt. CoaliEon Govt. CoaliEon Govt. CoaliEon Government OpposiEon Government Government Shiring Alliances OpposiEon Shiring Alliances Government Shiring Alliances

Term Term 2012-‐2018 2015-‐2020 2014-‐2018 2013-‐2017 2011-‐2016 2013-‐2019 2015-‐2019 2014-‐2018 2013-‐2017 2013-‐2018 2015-‐2020 2014-‐2018 2013-‐2018 2012-‐2016 2014-‐2019 2015-‐2019 2013-‐2017 2011-‐2015 2014-‐2019

Current Government Government Current

3 Cerén

President/ PM President/ Peña Nieto Peña Morales Santos Correa Humala Maduro Macri Rousseﬀ Bachelet Cartes Vázquez Solís Castro Medina Sánchez Maldonado TBD Hernández Ortega Varela

5 6 3 5 2 1 3 1 1 3 4 2 4 3 3 3 2 4 3↓ 3↑ Civil LiberTes LiberTes Civil

7 3 5 2 1 3 1 1 2 2 4 3 3 3 2 2 3 5↓ 4↑ 2↓ PoliTcal Rights Rights PoliTcal

Table 13 13 Table

6 1 6 1 7 8 1 4 1 POLITICAL ENVIRONMENT POLITICAL ENVIRONMENT of State Change Change of State Unscheduled Head

3 3 3 3 3 3

n/a 2000 1958 1989 1989 1993 1985 1949 1963 1984 1986 1982 1984 1994 1958 1980 1978 1980 1983 1985 Democracy Democracy Level of DemocraTc ConsolidaTon ConsolidaTon of DemocraTc Level ElecTon InauguraTng ElecTon InauguraTng

Freedom in the World 2015: https://freedomhouse.org/report/freedom-world/freedom-world-2015#.Vi5J5n6rTIU Freedom House definition: Those rights that enable people to participate freely in the political process. On Freedom House definition: 2015: https://freedomhouse.org/report/freedom-world/freedom-world-2015#.Vi5J5n6rTIU Freedom in the World Freedom House definition: Freedoms to develop views, institutions and personal autonomy apart from the 2015: https://freedomhouse.org/report/freedom-world/freedom-world-2015#.Vi5J5n6rTIU Freedom in the World Jimmy Morales, winner of the September 2015 election, will be sworn in as president on January 14, 2016.

NAFTA Mexico SOUTH AMERICA ANDEAN Bolivia Colombia Ecuador Peru Venezuela CONE & SOUTHERN BRAZIL ArgenEna Brazil Chile Paraguay Uruguay CENTRAL AMERICA & CARIBBEAN Costa Rica Cuba Dominican Republic El Salvador Guatemala HaiE Honduras Nicaragua Panama SOURCE & NOTES 1 this scale 1 represents the most free and 7 least 2 state. On this scale 1 represents the most free and 7 least free. 3

45 36 30 57 39 44 48 41 37 39 38 37 32 34 51 47 36 89 n/a n/a n/a n/a % Yes % Yes Crime VicBmizaBon Crime

3 76 78 28 n/a 57↑ 61↑ 75↓ 73↑ 52↓ 98↑ 88↑ 50↓ 95↓ 69↓ 35↓ Rank 118↑ 134↑ 108↓ 117↓ 106↓ 132↓ Global CompeBBveness Global

5 30 10 80 50 10 50 50 70 50 30 30 30 40 15 90 10 20 15↓ 10↓ 35↓ 20↓ PercenBle Rank PercenBle Property Rights Property

7 47 151 177 83↓ 12↑ 59↓ 28↑ 43↓ 51↑ 86↓ 62↓ 87↓ 68↑ Rank 2015 163↑ 156↑ 116↓ 108↓ 118↓ 169↑ 176↓ 139↑ Economic Freedom Freedom Economic

94 63 161 150 17↑ 69↑ 21↓ 47↑ 80↑ 94↑ 85↓ 21↑ 103↑ 103↑ 110↓ 115↑ 115↑ 126↑ 133↓ 107↓ 161↓ 100↓ Rank 2014 Table 14 14 Table CorrupBon PercepBon CorrupBon

Legal Environment Environment Legal

5 8 9 3 4 10 22 12 12 10 25 10 22 41 40 90 11 17 10 54 n/a n/a 100,000) 2011-‐2015 . The absence of an arrow indicates "no change" from the previous year. The absence of an arrow indicates "no change" from the previous year. . Homicide Rate (Per (Per Homicide Rate

LABER

8 33 18 88 32 0↓ 90↓ 38↑ 13↓ 42↓ 13↓ 55↑ 28↑ 76↑ 71↑ 40↑ 36↑ 14↑ 15↑ 29↓ 55↑ 43↑ Rule of Law PercenBle Rank PercenBle , produced by the World Economic Forum . This ranking is based on a total of 142 countries and determined by measuring 12 pillars competitiveness, including: Institutions, Infrastructure, Health & Primary Economic Forum . , produced by the World Index of Economic Freedom . Scores are based on a 1 to 100 scale, being an economic environment that is least conducive freedom, the most conducive. Countries also ranked in order free. laws protect private property rights and the degree to which its government enforces those laws. I00% indicates that is guaranteed by government, 0% The percentages measure the degree to which a country’s Index of Economic Freedom . .

Global Competitiveness Report 2015-2016

2015. "Have you, or someone in your family, been assaulted, attacked, or been the victim of a crime in the past 12 months?" Those who responded "Don't know" or did not provide an answer were excluded from the results. been assaulted, attacked, or the victim of a crime in past 12 months?" Latinobarometro 2015. "Have you, or someone in your family, Human Dev. Rep. 2014 Human Dev. Pgm , Up or down indicate, respectively, an improvement or a worsening of the environment from 2014 Up or down indicate, respectively, As measured by the World Bank's Governance Indicators: 1996-2014 . The percentages measure the extent to which agents have confidence in and abide by the rules of society, including perceptions of the incidence of crime, the effectiveness and predictability of the judiciary, and the and predictability of the judiciary, including perceptions of the incidence crime, effectiveness The percentages measure the extent to which agents have confidence in and abide by rules of society, Bank's Governance Indicators: 1996-2014 . As measured by the World The scores used in the index range from 10 (country perceived as virtually corruption-free) to for private gain. Focuses on corruption in the public sector and defines as abuse of office International, Corruption Perceptions Index 2014 . Transparency As measured by As measured by the Heritage Foundation's 2015 As measured by the Heritage Foundation's 2015 As measured by the As measured by UN Dev. ↑ ↓ NAFTA NAFTA United States (for comparison) Mexico SOUTH AMERICA ANDEAN Bolivia Colombia Ecuador Peru Venezuela CONE & SOUTHERN BRAZIL ArgenNna Brazil Chile Paraguay Uruguay CENTRAL AMERICA & CARIBBEAN Costa Rica Cuba Dominican Republic El Salvador Guatemala HaiN Honduras Nicaragua Panama ASIA China (for comparison) SOURCE & NOTES 1 enforceability of contracts. 2 The country ranks measure the corruption level in 177 countries as perceived by business people, risk analysts, investigative journalists and general public. almost 0 (country perceived as totally corrupt). 3 4 indicates that private property is outlawed. 5 Readiness, Market Size, Business Sophistication, and Innovation. Technological Financial Market Development, Labor Market Efficiency, Education, Higher Good Market Efficiency, 6 7 59

95 38 74 72 73 23 98 249 396 115 378 120 167 950 130 9,737 1,030 1,211 2,851 8,767 Commercial Value of Value Commercial Unlicensed Solware

a Intellectual Property Intellectual

65 79 52 84 74 18 68 88 54 59 80 72 50 82 74 75 79 69 59 68 Unlicensed Solware Use Solware

35 36↑ 84↓ 70↑ 40↓ 44↑ 42↑ 65↓ 52↑ 29↓ 39↓ 37↑ 69↓ 64↑ 68↓ 42↑ 38↑ 58↓ 33↑ 137↓ Proﬁt) Tax Rate (% Rate Tax

175 792 417 291 207 405 654 1,025 2,600 260↑ 239↓ 378↑ 184↑ 277↑ 286↑ 312↑ 261↑ 316↑ 256↑ 151↑ Hours Hours Required

Paying Taxes Paying

9 7 9 6 8 47 11 33 53 52 42 9↓ 7↑ 8↓ 9↑ 11↓ 20↑ 70↑ 10↓ 43↓ Payments Number of

97 51 93 51 31 54 30 89 93 50 216 190 241 147 414 112 102 163 55.7 10↑ Trade Trade Across Across Borders

Table 15 Table c (June 2014): a) Percentage of unlicensed software installed; b) Estimates are based on 2013 losses due

426 590 920 725 610 480 786 686 591 588 731 460 591 852 1,288 1,402 420↓ 389↑ 519↓ 453↓ Enforce Enforce BUSINESS ENVIRONMENT ENVIRONMENT BUSINESS Contracts

7 : a) Average time in calendar days spent registering a firm. b) Average time in calendar days spent completing the procedures Average time in calendar days spent registering a firm. b) Average : a) : a) total number of tax payments per year b) time it takes to prepare, file and pay (or withhold) the corporate income tax, t he 66 29 31 91 46 19 52↑ 22↑ 15↓ 52↓ 64↑ 23↑ 16↓ 38↑ 32↓ 45↑ 24↓ 58↓ 20↑ Days Required to Required Days Register Register Property

6 6 8 6 25 35 24 14 6↓ 5↑ 144 50↓ 11↑ 51↑ 26↓ 83↑ 15↑ 19↑ 13↑ 31↑ Start a Start Business 2013 BSA Global Software Piracy Study 2013 BSA

Doing Business 2016 Doing Business 2014

As measured by the World Bank Group's report As measured by the World Bank Group's report As measured by the World Alliance, As measured by the Business Software Up or down indicate, respectively, an improvement or a worsening of the environment from 2014. The absence of an arrow indicates "no change" from the previous year. The absence of an arrow indicates "no change" from the previous year. an improvement or a worsening of the environment from 2014. ↑ ↓ Up or down indicate, respectively, NAFTA United States (for comparison) Mexico SOUTH AMERICA ANDEAN Bolivia Colombia Ecuador Peru Venezuela CONE & SOUTHERN BRAZIL ArgenEna Brazil Chile Paraguay Uruguay CENTRAL AMERICA & CARIBBEAN Costa Rica Dominican Republic El Salvador Guatemala Honduras Nicaragua Panama ASIA China (for comparison) SOURCE & NOTES 1 time in hours necessary to comply with all Average files a lawsuit in court until the moment of payment. d) time in calendar days from the moment a plaintiff Average c) to register property. procedures required to export goods, 2 value added tax and social security contributions c) total amount of taxes mandatory payable by the business . 3 to copyright business software piracy in millions of USD.

60 SELECTED SOURCES MONITORED FOR 2015 LABER

PRINT The Wall Street Journal

ONLINE Agencia EFE (www.efe.com) América Economía (http://www.americaeconomia.com/) BBC Mundo.com (http://news.bbc.co.uk/hi/spanish/news/) Bloomberg.com: Latin America (http://www.bloomberg.com/news/regions/latinamerica.html) Business News Americas (http://www.bnamericas.com/) Brazil Focus: Weekly Report (Subscriptions available at [email protected]) Buenos Aires Herald (www.buenosairesherald.com/) Business Law Magazine (www.businesslaw-magazine.com/) Christian Science Monitor (http://www.csmonistor.com) Consensus Economics (http://www.consensuseconomics.com) Council on Hemispheric Affairs Report http://www.coha.org/( ) Economist Intelligence Unit (http://www.eiu.com/) The Economist (http://www.economist.com) Finance & Development (http://www.imf.org/external/pubs/ft/fandd/2015/12/index.htm) Financial Times (http://www.ft.com) Global Arbitration News (http://globalarbitrationnews.com/) Global Tax News (http://www.tax-news.com) The Guardian (www.theguardian.com) Infolatam (http://www.infolatam.com) Insurance Journal (http://www.insurancejournal.com) International Business Times (http://www.ibtimes.com) Investment Arbitration Reporter (http://www.iareporter.com) Journal of Commerce (http://www.joc.com) Jurist (http://jurist.org) Latin American Newspapers accessible through Latin American Network Information Center at: http://www1.lanic.utexas.edu/la/region/news/ Latin America Advisor (Subscriptions available at [email protected]) Latin American Caribbean & Central America Report (http://www.latinnews.com) Latin American Andean Group Report (http://www.latinnews.com) Latin American Brazil & Southern Cone Report (http://www.latinnews.com ) Latin American Herald-Tribune (http://laht.com/) Latin American Mexican & NAFTA Report (http://www.latinnews.com) Latin American Monitor (http://www.latinamericamonitor.com/) Latin Correspondent (http://latincorrespondent.com) Latinobarometro (http://www.latinobarometro.org) Los Angeles Times (http://www.latimes.com) Mercopress (http://en.mercopress.com) Miami Herald (http://www.herald.com) Mondaq Regional Business Briefing http://www.mondaq.com( ) Mining.com National Law Review (http://www.natlawreview.com) The New York Times (http://www.nytimes.com/) PanAm Post (http://panampost.com) Reuters SUR1810 (www.sur1810.com) Tico Times (http://www.ticotimes.net) World IP Review (www.worldipreview.com/) 61 PRIMARY DATA SOURCES International Monetary Fund (http://www.imf.org/) UN Economic Commission for Latin America and the Caribbean (ECLAC) (http://www.cepal.org/default.asp?idioma=IN) World Bank (www.worldbank.org)

ARTICLES CITED Niso Abuaf, “The International Cost of Capital: The Empirical Evidence,” Salomon Brothers (June 1997).

Aswath Damodaran, “Country Risk and Company Exposure: Theory and Practice, Journal of Applied Finance (Fall/Winter 2003).

Pablo Fernandez, Alberto Ortiz, and Isabel Acin, “Discount Rate (Risk-free Rate and market Risk Premium) used for 41 Countries in 2015: A Survey,” IESE Business School, 2015

Nora Lustig, “Most Unequal on Earth,” Finance and Development (September 2015).

Carmel Mesa-Logo, “Institutional Changes of Cuba’s Economic-Social Reforms,” Brookings Institution (August 2015).

Sebastian Sosa, Evridiki Tsounta, and Hye Sun Kim, “Is the Growth Momentum in Latin America Sustainable?” IMF Working Paper (May 2013).

Mark P. Sullivan, Cuba: Issues for the 114th Congress. Congressional Research Service (November 15, 2015).

62 63 Latin American Business Environment Program Latin American Business Environment Program Center for Latin American Studies Center for Latin American Studies UUniversityniversity of of F Floridalorida PO BoBoxx 11553 1155300 Gainesville,Gainesville, FL 32611-5530 USA FL 32611-5330 USA TTel: (352) 273-4723el: (352) 273-4723 FFax: (352) 392-7682ax: (352) 392-7682 wwwhttp://www.latam.ufl .edu/research-training/la-business-environment.latam.uﬂ.edu/research--training/la-business-environment

Center for for Governmental Governmental Responsibility Responsibility UUniversity of Florida Fredric G. Levin College of Lawniversity of Florida Fredric G. Levin College of Law POPO Box 117629 Box 117629 Gainesville, FL 32611-7629 Gainesville, FL 32611-7629 USA Tel: (352) 273-0836 FTel: (352) 273-0835ax: (352) 392-1457 Fax: (352) 392-1457 http://www.law.ufl .edu/academics/centers/cgr

64 65